How Much Do You Have to Put Down With a Conventional Loan?

A conventional loan is a mortgage provided by private lenders, such as banks or credit unions, and is not insured or guaranteed by a government agency. These loans represent the most common type of mortgage used by homebuyers. Unlike government-backed options, conventional loans carry specific requirements set by the lenders and often adhere to guidelines established by government-sponsored enterprises like Fannie Mae and Freddie Mac. A down payment is a fundamental part of securing a conventional loan, serving as the initial equity a borrower holds in the property. This upfront payment reduces the amount borrowed and signals a borrower’s financial commitment to the purchase.

Minimum Conventional Loan Down Payments

While a 20% down payment is often considered standard to avoid certain costs, many conventional loans, especially those conforming to Fannie Mae and Freddie Mac guidelines, allow for significantly lower down payments. For a primary residence, a minimum down payment of 3% is available, with 5% or 10% options common.

The required down payment varies based on the property’s intended use. For a primary residence, a single-family home might require as little as 3% down, while a multi-unit primary residence (two to four units) typically requires a minimum of 5%. Investment properties generally demand a larger down payment, often starting at 15% for a single-family property and potentially 25% or more for multi-unit investment properties. The loan-to-value (LTV) ratio, which compares the loan amount to the property’s appraised value, is directly tied to your down payment. A higher down payment results in a lower LTV, signifying less risk for the lender.

Factors That Affect Your Down Payment

Beyond minimum requirements, several factors influence the down payment a lender may require. A borrower’s financial profile plays a significant role, with a strong credit score leading to more favorable terms, including lower down payment requirements. Lenders view higher credit scores (above 620 for conventional loans) as an indicator of lower risk.

A lower debt-to-income (DTI) ratio, which measures a borrower’s monthly debt payments against their gross monthly income, also influences the down payment. A higher DTI might prompt a lender to require a larger down payment to mitigate perceived risk. The type of property also matters; while a single-family primary residence may qualify for a low down payment, a second home or an investment property will necessitate a higher upfront payment due to the increased risk associated with non-primary residences. Specific loan programs or lender overlays, which are additional requirements set by individual lenders beyond standard guidelines, also impact the required down payment.

Private Mortgage Insurance and Down Payments

When a down payment on a conventional loan is less than 20% of the home’s purchase price, Private Mortgage Insurance (PMI) is required. PMI is an insurance policy that protects the lender, not the borrower, against potential losses if the borrower defaults on the mortgage. It mitigates the increased risk lenders assume when financing a home with a lower down payment.

PMI is paid as a monthly premium, added to the regular mortgage payment. The cost of PMI can vary, ranging from 0.3% to 2% of the original loan amount annually, influenced by factors such as the loan amount, the down payment size, and the borrower’s credit score. While PMI adds to the monthly housing expense, it allows borrowers to purchase a home sooner without needing a substantial 20% down payment. PMI can eventually be removed once sufficient equity is built in the home, when the loan-to-value ratio reaches 80% of the original home value.

Acceptable Down Payment Sources

Lenders permit down payments to originate from various legitimate sources. Personal savings and checking accounts are common. Funds seasoned in an account for 60 days are preferred. Another accepted source is gift funds, which involve money provided by a relative or, in some cases, a close friend or employer.

When using gift funds, specific documentation is required, including a gift letter signed by the donor. This letter must state that the money is a gift and not a loan, and it includes the donor’s name, relationship to the borrower, and the exact amount of the gift. Lenders may also request bank statements from both the donor and the recipient to verify the origin and transfer of the funds. Proceeds from the sale of an existing home are also a common source for a down payment on a new property. Down payment assistance programs can also provide funds, though these programs have specific eligibility criteria that vary by location and program type.