A conventional loan is a popular type of mortgage that people take out to purchase their home. It doesn’t matter whether you’re a first-time buyer or not and conventional loans are suitable for lots of different borrowers and property types.
While conventional loan programs have requirements influenced by government-sponsored organizations like Fannie Mae and Freddie Mac, they are not government-backed loans.
This means that lenders can set out their own eligibility criteria for approval. One of the criteria that varies between lenders is the down payment.
A down payment is the biggest hurdle for many people looking to buy their own home, but it is possible to put a much lower down payment than most people think.
How much down payment do you need for a conventional loan?
It’s a common misconception that you always need a 20% down payment for a conventional loan. The truth is that it can be as little as just 3%.
However, not everyone qualifies for a 3% down payment. To put down this minimum, you will need a high credit score, sometimes as high as 660 to prove to lenders that you are not a risk to lend to.
In most cases, a 5% down conventional loan is more doable. However, you will still need a high credit score of about 620 and an acceptable debt-to-income ratio to qualify.
Of course, the main benefit of saving up for a 5% down payment is that it will result in lower monthly mortgage payments than a 3% down conventional loan would. But one thing to bear in mind is that any down payment less than 20% will usually require private mortgage insurance (PMI) which is another cost to factor into buying a home.
5% down conventional loan vs. VA loans vs. FHA loans
If you are an active-duty military member, veteran, or surviving spouse, VA loans may seem like a no-brainer alternative to a conventional loan. With no down payment required, no mortgage insurance, and great interest rates, what’s not to love?
However, it’s still worth weighing up the differences between VA loans and conventional loans, especially if you’re planning to put a small down payment down anyway.
With VA loans, there’s the VA funding fee to think about which you need to pay to close a VA home loan. There’s also private mortgage insurance to consider if you’re taking out a conventional loan.
One thing to weigh up is the differences in eligibility requirements. For a VA loan, there’s no down payment required and no minimum credit score (although the lender will set their own one).
With a conventional loan, the minimum down payment is as low as 3% and a score of 620 is generally expected.
Another alternative if you’re not eligible for VA loans, is the Federal Housing Administration (FHA) loan program which offer similar terms. An FHA loan is a loan insured by the government and issued by FHA- approved lenders. FHA loans also have low down payment requirements – 3.5% if you have a FICO score of 580 and above, or 10% if your score is below that.
If you are struggling to decide how much down payment you need to make or which type of home loan to take out, get in touch with OVM Financial today to see how we can help.