How Much Do I Need to Put Down for a Conventional Loan?

Conventional loans are a widely used mortgage option, adhering to guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac rather than being government-backed. A down payment is the initial equity contribution a borrower makes towards a home’s purchase price. This upfront payment reduces the borrowed amount and demonstrates commitment.

Conventional Loan Down Payment Minimums

While 20% is often considered traditional, many conventional loan programs permit lower contributions. Fannie Mae and Freddie Mac, which set conventional loan guidelines, offer programs like HomeReady and Home Possible that typically require a minimum down payment of just 3% for eligible borrowers. Other options may require 3% or 5% down. Eligibility for these lower down payment options often depends on factors such as credit score, income, and first-time homebuyer status. These programs aim to expand access for low-to-moderate income borrowers, offering more flexible criteria.

Factors Influencing Down Payment Requirements

Several factors can influence the actual down payment required by a lender, potentially exceeding minimums.

A borrower’s credit score plays a significant role; higher scores generally provide access to more favorable loan terms and lower down payment options. Lenders often seek a minimum credit score, with 620 being a common threshold, though higher scores can lead to better interest rates.

The debt-to-income (DTI) ratio, comparing monthly debt payments to gross monthly income, is another important consideration. A lower DTI ratio indicates a stronger ability to manage debt, making a borrower more attractive to lenders and influencing down payment requirements.

The loan-to-value (LTV) ratio, representing the loan amount as a percentage of the home’s appraised value, directly relates to the down payment; an 80% LTV corresponds to a 20% down payment.

Property type also impacts down payment expectations. Primary residences typically have the lowest requirements, while second homes and investment properties necessitate higher down payments due to increased lender risk.

Lenders may also have stricter requirements, known as overlays, beyond baseline conventional loan guidelines. These overlays can lead to a higher effective minimum down payment than set by Fannie Mae or Freddie Mac.

Understanding Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is typically required on conventional loans when the down payment is less than 20%. Its purpose is to protect the lender in the event of default, mitigating the increased risk when a borrower has less equity.

PMI costs are usually paid as a monthly premium, added to the regular mortgage payment. While it adds to the overall monthly housing expense, PMI allows borrowers to purchase a home sooner with less upfront capital, thereby expanding access to homeownership.

Federal law mandates automatic PMI cancellation once the loan’s principal balance reaches 78% of the home’s original value.

Borrowers can also proactively request PMI cancellation once their loan balance reaches 80% of the original property value, provided they are current on their mortgage payments. This often requires a written request to the loan servicer and may involve a property appraisal to confirm the current value. Refinancing the loan can also be a way to remove PMI if sufficient equity has been built.

Funding Your Down Payment

Several sources can fund a conventional loan down payment.

Personal savings held in checking or savings accounts are the most common and straightforward source. Lenders typically require statements covering a few months to verify the origin and seasoning of these funds.

Gift funds from family members are generally permissible, especially for primary residences. A formal gift letter is required, stating the funds are not a loan and no repayment is expected. This letter includes the donor’s name, relationship, amount, and source.

The sale of other assets, such as a previous home, stocks, or bonds, can also provide down payment funds.

Funds from retirement accounts like 401(k)s or IRAs can also be used. Be aware of potential tax implications and penalties for early withdrawals, especially if under age 59½. Some plans offer loans against the balance to avoid these.

Additionally, various state, county, or city-level down payment assistance (DPA) programs are available, offering grants or second mortgages to help cover down payment and closing costs. These programs can be a valuable resource, though their availability and eligibility criteria vary by location.