Can You Get a Conventional Loan With a 5% Down Payment?

Securing a conventional loan with a 5% down payment is a common option for many homebuyers. While a 20% down payment has been traditionally standard, various programs and lender guidelines now accommodate lower initial contributions. Understanding the requirements and implications is important for navigating this path to homeownership, allowing more individuals to enter the housing market without needing a substantial sum upfront.

Meeting Eligibility Requirements

Obtaining a conventional loan with a lower down payment requires meeting specific financial criteria established by lenders and entities like Fannie Mae and Freddie Mac.

A strong credit history is fundamental, with most lenders requiring a minimum credit score of around 620 for conventional loans. A higher credit score, generally 720 or above, can result in more favorable interest rates and loan terms.

The debt-to-income (DTI) ratio compares a borrower’s total monthly debt payments to their gross monthly income. Lenders typically prefer a DTI ratio of 36% or lower, though many approve loans up to 43%. With strong compensating factors like substantial cash reserves or a higher credit score, a DTI ratio nearing 50% might be accepted.

Stable income and consistent employment are verified. Lenders typically require documentation such as pay stubs, W-2 forms for the past two years, and tax returns if self-employed. Lenders generally look for at least two years of continuous employment in the same field.

Conventional loans with low down payments are typically for primary residences. Fannie Mae allows a 5% down payment for owner-occupied 2-4 unit properties. Investment properties generally demand a larger down payment, often 15% to 20% or more, due to higher perceived risk.

The loan amount must conform to limits set annually by the Federal Housing Finance Agency (FHFA), known as conforming loan limits. For 2025, the baseline conforming loan limit for a one-unit property in most of the U.S. is $806,500. These limits can be higher in designated high-cost areas, reaching up to $1,209,750 for a single-unit property. Loans exceeding these amounts are considered jumbo loans and have different qualification criteria.

Having cash reserves after closing is a consideration for some conventional loan programs. Demonstrating liquid assets beyond the down payment and closing costs can be relevant for borrowers with lower credit scores or higher DTI ratios, serving as a compensating factor.

Understanding Private Mortgage Insurance

Private Mortgage Insurance (PMI) is a significant aspect of conventional loans when the down payment is less than 20% of the home’s purchase price. This insurance protects the lender, not the borrower, in the event of mortgage default. Lenders require PMI because a lower down payment increases their risk exposure, and it typically adds to the borrower’s monthly mortgage payment.

The cost of PMI is generally calculated as a percentage of the original loan amount and can range from approximately 0.3% to 2% annually. Several factors influence the exact premium, including the loan amount, the size of the down payment, and the borrower’s credit score. A larger down payment and a higher credit score can lead to lower PMI costs.

PMI is most commonly paid as a monthly premium, which is added to the regular mortgage payment. In some instances, lenders may offer alternatives such as a one-time upfront payment at closing or a combination of an upfront payment and lower monthly premiums. These options can affect the overall cost and structure of the mortgage.

A key distinction exists between PMI and Mortgage Insurance Premium (MIP) for FHA loans. Unlike FHA MIP, which often lasts for the entire loan term, PMI on conventional loans can be removed under specific conditions, providing a clear financial benefit.

There are two primary ways to remove PMI: borrower-initiated cancellation and automatic termination. For borrower-initiated cancellation, a homeowner can request PMI removal once their loan-to-value (LTV) ratio reaches 80% of the home’s original value. To qualify, the borrower must:

• Submit a written request to their loan servicer.
• Maintain a good payment history (typically no payments 30 days late in the last 12 months or 60 days late in the past 24 months).
• Certify no junior liens exist on the property.

An appraisal may be required to confirm the property’s value at the borrower’s expense.

Automatic termination of PMI occurs when the LTV ratio based on the original value reaches 78% or when the loan reaches the midpoint of its amortization period, whichever comes first. This termination happens automatically, provided the borrower is current on payments. The Homeowners Protection Act of 1998 outlines these federal requirements.

Navigating the Application Process

After understanding eligibility and PMI, the next step is navigating the conventional loan application process. This begins with securing a pre-approval, which provides a clear understanding of borrowing capacity. During pre-approval, a lender reviews income, credit, and assets to determine the maximum loan amount a borrower might qualify for.

A pre-approval letter indicates to sellers that a buyer is serious and financially capable, which is advantageous in competitive housing markets. This letter outlines the pre-approved loan amount, interest rate, and loan type, though it is not a final loan commitment. It helps narrow the home search to an affordable price range.

The formal loan application involves submitting the Uniform Residential Loan Application, Form 1003. This standardized form gathers detailed personal and financial information, covering:

• Employment history.
• Income sources.
• Assets (e.g., bank accounts, investments).
• Liabilities (e.g., credit card balances, other loans).

Following application submission, the loan enters the underwriting phase. Underwriters review all documentation to assess lending risk. They verify income, employment, credit history, and financial stability, ensuring the loan meets lender guidelines and criteria set by Fannie Mae and Freddie Mac.

As part of underwriting, an appraisal and a home inspection are typically conducted. The appraisal determines the property’s market value, ensuring it justifies the loan amount requested and protecting both lender and borrower. A home inspection is highly recommended for the buyer to identify any potential property issues.

Upon successful underwriting, the loan reaches approval. The final step is loan closing. At closing, the borrower signs legal documents, including the Closing Disclosure (detailing terms and costs), the Promissory Note (promise to repay), and the Deed of Trust or mortgage (securing the loan).

Closing typically takes place at a title company or escrow office, overseen by a closing agent. Funds are disbursed, and the property title transfers from seller to buyer. Borrowers must carefully review all documents before signing and bring required identification and certified funds for closing costs. Effective communication helps ensure a smooth and timely closing.