Can You Get a Conventional Loan With 10% Down?

A conventional loan provides a pathway to homeownership that is not directly insured or guaranteed by a government agency. These loans are instead offered by private lenders, such as banks, credit unions, and mortgage companies. For many aspiring homeowners, obtaining a conventional loan with a down payment as low as 10% is indeed a viable option. This approach allows individuals to enter the housing market without the larger upfront capital typically associated with a 20% down payment.

Qualifying for a Conventional Loan

Securing a conventional loan, particularly with a lower down payment, hinges on a borrower’s financial profile. Lenders assess several key factors to determine eligibility and the terms of the loan. A strong financial standing demonstrates a borrower’s ability to manage repayment obligations.

Credit score is a primary indicator of a borrower’s creditworthiness. While a minimum FICO score of 620 is generally required for conventional loans, a score in the “good” range, typically 670 or higher, can lead to more favorable interest rates. Lenders evaluate credit history to gauge responsible financial behavior and a consistent payment record.

Another important metric is the debt-to-income (DTI) ratio, which compares monthly debt obligations to gross monthly income. Most lenders prefer a DTI ratio of 43% or lower, though some may approve loans with a DTI up to 50% if the borrower has compensating factors, such as a higher credit score or significant financial reserves. This ratio helps ensure that a borrower’s budget can comfortably accommodate a new mortgage payment alongside existing debts.

Lenders also require evidence of stable income and a consistent employment history, typically looking for a minimum of two years in the same field or with the same employer. This stability reassures lenders about a borrower’s long-term ability to repay the loan. Income verification usually involves submitting documentation such as pay stubs, tax returns, and employment verification.

Beyond the down payment, borrowers must demonstrate sufficient liquid assets to cover closing costs and maintain financial stability after the home purchase. Lenders often look for reserves, which are funds equivalent to a certain number of months of mortgage payments, typically ranging from two to six months. These assets, which include savings, checking accounts, or marketable securities, should be “seasoned,” meaning they have been in an account for at least 60 days.

The type of property also influences conventional loan eligibility. Conventional loans are commonly available for single-family homes and multi-unit properties, typically up to four units, that are residential in nature. The property must be located in the United States or its territories, be securable with a good title, and meet basic safety and structural soundness standards.

Understanding Private Mortgage Insurance

When a conventional loan is secured with a down payment less than 20% of the home’s purchase price, Private Mortgage Insurance (PMI) typically becomes a requirement. PMI is an insurance policy designed to protect the lender, not the borrower, in the event of default on the mortgage. This additional cost is a direct financial implication of making a smaller down payment.

PMI is typically paid as a monthly premium, which is added to the regular mortgage payment. The cost of PMI can range from approximately 0.46% to 1.5% of the loan amount annually, influenced by factors such as the loan-to-value (LTV) ratio, credit score, and down payment size. In some cases, it can be paid as a single upfront premium, or through a combination of upfront and monthly payments. Lender-paid PMI is another option, where the lender pays the premium in exchange for a slightly higher interest rate on the loan.

A significant aspect of PMI is its cancellability, offering a path for borrowers to eventually remove this expense. Borrowers can request the cancellation of PMI once their loan-to-value (LTV) ratio reaches 80%, meaning the mortgage balance is 80% or less of the home’s original appraised value or current market value, whichever is lower. This typically occurs through a combination of making regular mortgage payments and potential home appreciation.

Furthermore, the Homeowners Protection Act provides specific conditions for automatic PMI termination. Lenders are generally required to automatically cancel PMI once the loan balance reaches 78% of the original value of the home, provided the borrower is current on their mortgage payments. Borrowers should actively track their equity to determine when they qualify for PMI removal, as this can lead to substantial savings over the life of the loan.

Additional Financial Considerations

Beyond the down payment and Private Mortgage Insurance, several other financial aspects warrant attention when securing a conventional loan. These additional costs contribute to the overall expense of homeownership and should be factored into a borrower’s financial planning. Understanding these elements can prevent unexpected financial burdens during the home buying process.

Closing costs represent a significant expense incurred at the completion of a real estate transaction. These fees cover various services related to the loan and property transfer, including appraisal fees, loan origination fees, title insurance, and recording fees. While the exact amount can vary, closing costs typically range from 2% to 5% of the loan amount, paid at the time of closing.

Many mortgages utilize an escrow account, which is a dedicated account managed by the loan servicer. This account holds funds collected from the borrower to pay for recurring property-related expenses, such as property taxes and homeowner’s insurance premiums. By collecting a portion of these costs with each monthly mortgage payment, the escrow account ensures timely payment of these obligations.

Prepaid expenses are another category of costs due at closing. These include items like initial homeowner’s insurance premiums and prepaid interest, which covers the interest accrued on the loan from the closing date to the first full mortgage payment due date. These amounts are paid in advance to establish necessary services and cover initial charges.

Homeowner’s insurance is a mandatory requirement for all mortgage loans. This coverage protects the property against damage from various perils, such as fire, theft, and natural disasters, safeguarding both the homeowner’s investment and the lender’s collateral. Establishing adequate insurance coverage is a prerequisite for loan approval.

Maintaining financial reserves beyond the down payment and closing costs is a prudent practice. These liquid assets provide a financial cushion for unexpected home-related expenses that may arise after moving in, such as repairs or maintenance. Having readily accessible funds ensures financial stability in the initial period of homeownership.

Navigating the Loan Application Process

The journey to securing a conventional loan with a 10% down payment involves a structured application process, beginning well before an offer is made on a home. Understanding these procedural steps helps to streamline the experience and prepare borrowers for what to expect. Each stage plays a role in moving from initial inquiry to final loan approval.

The first crucial step is obtaining a mortgage pre-approval. This involves a lender reviewing a borrower’s basic financial information, including income, assets, and credit history, to provide an estimate of how much they can borrow. To secure pre-approval, individuals typically provide personal identification, proof of income such as recent pay stubs and two years of W-2 forms, and bank statements. A pre-approval letter demonstrates to sellers that a buyer is serious and financially capable, strengthening purchase offers.

Once pre-approved, the formal loan application submission begins. This stage requires borrowers to provide comprehensive documentation to verify their financial standing. Lenders will typically request recent pay stubs, detailed bank statements for the past two to three months, and tax returns for the past two years to confirm income stability and asset availability. This thorough documentation allows the lender to fully assess financial stability.

Following application submission, the loan enters the underwriting phase. During this period, the lender’s underwriters meticulously review all submitted documents and financial information. They assess the borrower’s creditworthiness, evaluate the property, and confirm that all loan criteria are met, ensuring the loan presents an acceptable level of risk. Underwriters may request additional information or clarification on specific financial transactions.

As part of the underwriting process, a mandatory home appraisal is conducted to determine the property’s market value, ensuring the loan amount is appropriate for the collateral. While not typically a lender requirement for conventional loans, a home inspection is highly recommended for the buyer. An inspection provides a detailed assessment of the property’s condition, identifying potential issues that an appraisal, which focuses solely on value, would not uncover.

The final stages involve loan approval and closing, typically occurring within 30 to 47 days from the initial application. Once underwriting is complete and all conditions are satisfied, the loan receives final approval. The borrower receives a Closing Disclosure at least three business days prior to the closing date, outlining the final loan terms, projected monthly payments, and total closing costs. On closing day, all necessary documents are signed, the down payment and closing costs are paid, and the property title is officially transferred, completing the home purchase.