Because the government doesn't insure conventional loans, the requirements can be stricter than the federal mortgage programs. Lenders may require higher credit scores and lower debt-to-income ratios (DTI) for conventional borrowers.
And although the minimum required down payment is 3%, borrowers may sometimes need to put down more to qualify for a conventional mortgage, especially if they have less-than-perfect credit.
Still, the benefits of conventional loans can outweigh the higher barriers to entry - especially for borrowers with strong credit profiles.
Conventional loan benefits
- Low minimum down payments: Put down as little as 3%
- No upfront mortgage insurance: Unlike USDA, FHA, and VA loans, conventional mortgages do not require an upfront mortgage insurance premium or funding fee
- Cancellable PMI: Unlike FHA or USDA loans, private mortgage insurance (PMI) falls off of a conventional loan once you have 20% home equity. You can also avoid PMI altogether if you put 20% down
- Fewer property restrictions: Conventional home loans are go-to products if you're buying an investment property or a second home since government-backed loans, including USDA, VA, and FHA, do not allow those property uses
- Higher loan limits: Compared to FHA loans, conventional loans have higher loan limits so you may be able to finance a more expensive home
Conventional loan requirements in 2021
Higher loan limits, low down payment requirements, competitive interest rates for well-qualified homebuyers - conventional loans have a lot to offer when you're starting your homebuying journey.
But you will need to meet conventional home loan requirements, which include:
- Credit score: 620 is the minimum credit score for conventional loans, but to get more competitive rates, you'll likely need a score above 700
- Down payment: 3% is the minimum, but putting down more may help you qualify and get a better rate
- DTI: Debt to Income is determined by the Automated Underwriting Response your loan receives. This amount is based on your personal loan scenario.
Conventional loan alternative
If you don't meet these conventional loan qualifications, don't give up. You could still buy a home with a government-backed loan program.
FHA loans have a lower credit score requirement of 580 for a 3.5% down payment, so you may be able to buy a home by saving just a little more to put down. USDA and VA loans offer 0% down payment options and have flexible credit score requirements.
You may also qualify for down payment assistance programs or be able to use gift funds from family or friends. More on that later, though.
How much do you need for a conventional loan down payment?
The minimum down payment for a conventional loan is 3%. For a $300,000 home, 3% down would equal $9,000 down.
Some conventional loan programs require higher down payments:
Conventional 97 program: 3% minimum down payment
Fannie Mae HomeReady program: 3% minimum down payment
Freddie Mac Home Possible program: 3% minimum down payment
Piggyback loan (avoids PMI): 10% minimum down payment
Conventional loan without PMI: 20% minimum down payment
Pro Tip: While 3% is the minimum down payment for a conventional loan, you could save more money by making a bigger down payment.
Let's explore the reasons why.
More money down = lower monthly payments
The more you put down, the less you'll have to borrow. The less you borrow, the less interest you'll pay over the life of the loan.
Let's compare monthly payments based on down payment sizes. In this example, your home costs $300,000 and you're getting a fixed rate of 3% and a 30-year loan term:
|% down||Amount down||Amount borrowed||Monthly payment*|
*The monthly payments shown here do not include additional fees such as homeowners insurance, property taxes, or PMI on conventional loans. Payments are for example purposes only. Not based on currently available rates. With 20% or more down on a conventional loan you wouldn't pay any PMI.
More money down also = Less PMI on conventional loans
PMI could add $100 or more to your monthly mortgage payment unless you can afford a 20% down payment.
But even if you can't afford 20% down, you can cancel your conventional loan mortgage insurance once you've paid off 20% of the home's purchase price.
So putting down 5% or 7% means you'd start out closer to this 20% target and would get there more quickly.
Do all conventional loans have private mortgage insurance (PMI)?
No. You only need PMI when you put down less than 20%.
Private mortgage insurance is often avoided because it protects the lender, not the buyer, even though the buyer pays for it. But it's not a bad thing. It has helped millions of first-time buyers net tens of thousands of dollars in home equity that they would have missed out on.
|Pro Tip: Another upside of PMI is that if you do put down less than 20%, you'll only be obligated to pay PMI until you reach 20% equity in the home. (Some mortgage servicers require 22% equity before you cancel PMI.)|
That's an advantage over some government programs that require an upfront and annual mortgage premium (MIP), regardless of your down payment.
With an FHA loan, the MIP requirement ends after 11 years if you put down 10% or more. But you'll still owe an upfront fee of 1.75% of the loan, plus mortgage insurance for those first 11 years.
Most FHA - and USDA - borrowers pay mortgage insurance for the life of the loan or until they 1) Gain 20% equity; and 2) refinance into a conventional loan.
It is also possible to avoid PMI while paying only 10% down by taking out a second mortgage alongside your primary conventional loan. We'll explore this "piggyback" loan method more later in this guide.
More money down can improve interest rates
If a friend asked you to borrow money so they could buy a $1,000 new iPhone, would you feel better knowing your friend had saved $400 to put toward the purchase? That way, they'd be investing some of their own money and wouldn't be asking you to front the entire cost of the phone.
Mortgage lenders tend to approach home loans in a similar way. They know homebuyers who put down 10% are less likely to fall behind on payments.
Lower risk to the lender can translate into lower interest rates for you. And even a slightly lower rate can save you thousands of dollars over the life of the loan.
More money down can make qualifying easier
With so much demand for mortgages in today's market, lenders and the GSEs can tighten their qualifying ratios, making it harder to qualify for a conventional loan if you meet only the minimum requirements.
By coming up with a down payment that exceeds the 3% minimum, you may be putting yourself in a better qualifying position. Every little bit can help, even if it's just 5% down instead of 3%.
Conventional loan down payment translates into equity
The money you put down, the more of your home you own outright. When you put down, say, 5% on a home valued at $300,000, you own $15,000 worth of home from the minute you close.
This $15,000 is your "equity" in the home. Over time, as you make payments and the home appreciates in value, your equity will grow. Later, once your equity grows large enough, you could borrow against it and use the cash to renovate or expand the home - or to make a down payment on a second home.
A larger down payment gives you a nice head start on the road to building wealth through home equity. However, putting less money down can get you into a home quicker than waiting to save for a 20% down payment. Here's what that looks like for a renter making $36,000 annually saving up for a $297,000 home.
I can afford a monthly mortgage payment, but I don't have 3% to put down. Can I still get a conventional mortgage loan?
Lower down payments make home buying with a conventional mortgage loan a lot easier than the old 20% requirement. But what happens if you struggle to save up 3% down in cash?
After all, 3% of a $300,000 home is still $9,000 - a sizable sum, especially if you're paying rent, making student loan payments, and dealing with credit cards and other debts.
If you simply can't get together the minimum down payment, you don't have to delay your homebuying timeline for another few years.
YOU MAY BE ABLE TO GET CONVENTIONAL LOAN DOWN PAYMENT ASSISTANCE FROM:
- Down payment assistance programs: You could apply to a conventional loan down payment program offered by nonprofit organizations in your community
- Gifts: You could ask family members or close friends to help you make a down payment. Some homebuyers ask for down payment help in lieu of wedding or graduation gifts, for example
However, if you are looking into obtaining a gift for your down payment, it is important to reach out to your Loan Officer first to ensure the documentation is done properly and the person who is gifting the funds is an approved person within the guideline requirements.
Using gifts and assistance programs for conventional loans isn't always possible. Some lenders and loan programs require you, as the homebuyer, to put a minimum amount of your own money toward the loan.
Be sure to check with your loan officer up front about your minimum contribution so you'll know where you stand.
You may be able to meet a lender's minimum contribution requirements while still getting some down payment help. Perhaps your family or friends who want to help could pay down some of your debts for a few months, freeing up money you can put toward your down payment.
Or you may need to consider other mortgage loans. Both FHA and USDA loans allow your down payment and closing costs to come from gifts. If you qualify for a USDA loan, you can avoid a down payment altogether and use gift funds or closing cost assistance toward your closing costs, meaning you can buy with very little money out of pocket.
How down payment assistance programs can help
Down payment assistance programs help homebuyers cover their upfront costs, often via a grant or a forgivable second loan, possibly with 0% interest. Oftentimes, the program requires homebuyers to stay in the property for a minimum number of years before the loan is forgiven.
You can find assistance programs at the state, county, and city levels. You can find some programs through the U.S. Department of Housing and Urban Development (HUD) website, though not all programs are linked there.
HERE ARE SOME OTHER WAYS TO FIND OUT ABOUT DOWN PAYMENT ASSISTANCE PROGRAMS IN YOUR AREA:
- Ask your real estate agent: You aren't the first homebuyer to need down payment help. An experienced real estate agent may know about down payment assistance programs in your market.
- Check your city or county website: Local municipalities often encourage homebuying through assistance programs to boost their local economies. Check your local government website, or call City Hall directly
- Ask your loan officer: Your loan officer may have a database of assistance programs
- Ask your tax preparer: Some assistance programs play out in the form of tax credits. If you use a professional tax preparer, he or she likely knows about local programs
- Google it: Search engines often use your location to filter results, so it's possible to find assistance programs with a quick web search. Just make sure the programs you find work with conventional mortgage loans
We may also see down payment assistance at the federal level, though that day hasn't come yet. Lawmakers introduced the Down Payment Toward Equity Act of 2021 to help first-time, first-generation homebuyers purchase homes. The act has not been signed into law, but it proposes up to $25,000 in down payment assistance for eligible borrowers.
What is a Piggyback Loan?
A piggyback loan could double your conventional loan down payment, turning your 10% down payment into the 20% down you'd need to avoid paying PMI - well, sort of.
Piggyback loans are actually two loans. Here's how this strategy, also known as an 80/10/10 loan structure, works:
- 80% from the mortgage: You'd get approved for a conventional loan covering 80% of your home's purchase price - that's a $240,000 loan for a $300,000 home, for example.
- 10% from a second mortgage: You'd take out a second mortgage loan worth 10% of the home price - that's $30,000 on our $300,000 home example - to put toward your down payment.
- 10% from you: You'd provide the other 10% of the home's purchase price in cash to combine with funds from the second mortgage to complete your 20% down payment requirement, avoiding PMI premiums for the life of the loan.
So, it's not a free 10% down payment, but lenders count the financed portion toward the 20% minimum to avoid PMI.
The downside? You'd have two mortgage payments on the same home. If you sold the home, you'd have to pay off both loans, cutting into your profit.
The upside? Along with avoiding PMI, you may also qualify for lower interest rates on your primary mortgage because of the bigger down payment.
And, getting a smaller primary mortgage loan - one worth only 80% of the home's purchase price - may keep you within conventional loan limits if you're buying a high-price home.
Conventional loan limits 2022
Fannie Mae sets conforming loan limits each year for conventional loans. Conforming loan limits vary by the number of housing units within a property, as well as the location.
# of housing units within property Max loan size in Continental U.S. (48 contiguous states plus D.C.) Max loan size for higher value areas (and all areas in Hawaii, Alaska, Guam, and U.S. Virgin Islands) 1 $647,200 $970,800 2 $828,700 $1,243,050 3 $1,001,650 $1,502,475 4 $1,244,850 $1,867,275
Fannie Mae increases conventional loan limits in higher value metro areas - places where homes cost more. Eighteen states, plus D.C., include higher value metro areas. You can enter your property's address in this tool to see loan limits specific to that property.
Conventional loan limits do not show your actual borrowing power. They show the conventional max loan amount for the property you're buying. Your lender will set your actual loan size based on your credit score, down payment amount, income, and existing debts.
Conventional loan interest rates
Conventional home loan rates vary based on your financial profile, including your down payment, credit score, and debt-to-income ratio.
It's a good idea to get quotes from at least three mortgage lenders. Comparing multiple quotes will give you a sense of your interest rate range, and it will allow you to see who is offering the best deal overall.
You want to look not just at the interest rate, but at the other fees they're charging, including origination and processing fees.
Conventional loan appraisal requirements 2021
Your lender will order a property appraisal to make sure the home has enough value to justify the loan size and that it meets the conventional loan property requirements.
Fannie Mae's conventional loan property requirements for 2021 include that the home must be:
- Safe, sound, and structurally intact
- A single-family home (or a multi-family property with no more than four housing units)
- Able to be used year-round
- Residential and not commercial
- Located in the U.S. or its territories (Guam, Puerto Rico, U.S. Virgin Islands) although not all lenders will approve loans outside the 50 states and D.C.
- Accessible by public roads and connected to public utilities
- Insurable (your home insurance company may ask for a few structural improvements)
- Able to be titled to you (a title search will be part of the closing process)
Most homes on the market will meet these requirements.
Conventional loan property requirements can be less strict than government loan requirements, and sellers are sometimes more inclined to accept conventional loan offers for this reason.
Lenders cannot move forward with FHA, VA, or USDA loans if the appraiser determines that the property doesn't meet strict government guidelines, whereas conventional loans may allow for more flexibility in going ahead with the purchase and how and when the repairs are made.
Property use requirements
VA, USDA, and FHA loans can help you buy your primary residence, but they typically don't finance investment properties or vacation homes.
However, you can use a conventional mortgage to buy a vacation home or a rental property.
If you already own your primary residence but want to buy another home to rent out, or if you're ready to buy a second home at the beach or in the mountains, you'll need a conventional loan.
I'm a first-time homebuyer. Should I apply for a conventional loan?
First-time homebuyer conventional loans can offer higher loan limits, lower mortgage insurance costs, and more lenient property requirements. But not all first-time homebuyers can get a competitive conventional loan rate.
Borrowers who have average to poor credit, lower incomes, or higher debt burdens should consider a government-backed loan instead of a first-time homebuyer conventional loan.
As you can see on the chart below, government-backed loan programs offer more flexibility to someone who has some gaps in their borrower profile.
Loan Type USDA FHA VA Conventional Minimum down payment 0% 3.5% 0% 3% Credit score 620 580 580-620 620 Income limits Yes None None None*
*There are income limits on certain Affordable Housing Programs such as Freddie Mac's Home Possible®.
Not all government-backed loans are available to all borrowers. USDA loans work only in rural and some suburban areas and only for borrowers with moderate incomes, for example. Only veterans, active-duty servicemembers, Reservists, and eligible surviving spouses can qualify for a VA loan.
How much does a conventional loan cost?
Along with cash for a down payment, you'll need money for your conventional loan's closing costs, which average 3% to 5% of the purchase price.
Closing costs include a variety of fees, though specifics vary based on your lender and where you buy.
BUT SOME COMMON CLOSING COSTS INCLUDE:
- Lender's fees: Lenders charge loan origination fees which could be 0.5% to 1% of the loan amount. For a $300,000 home with 3% down, a 1% original fee would total $2,910. Some banks also tack on application fees of $500 or so. Others also add smaller rate-lock fees or underwriting fees
- Appraisal fee: A third-party appraiser typically charges about $500 to assign a market value to the home
- Title company fees: Making your home purchase official requires all sorts of paperwork, including title searches and making records of deeds. Expect to pay an attorney about $1,000 to $1,500 for this service
- Taxes and homeowners insurance: You may have to prepay a year's worth of property taxes or homeowners insurance right off the bat
- Miscellaneous fees: You'll see all sorts of small fees to pay for details such as transferring documents, pulling your credit report, and inspecting for lead paint (in homes built in 1978 or before), and flood insurance certifications (for homes in FEMA-designated flood zones)
Some borrowers also "buy down" their mortgage rates with discount points at closing. Paying an extra 1% of the loan amount could shave 0.25% from your interest rate which could pay off if you stay in the home long enough.
Just like down payment assistance, it's possible to find closing costs assistance programs in your area. Use the tips included in the down payment assistance section to search for closing cost help as well.
You can also negotiate with the seller and ask them to cover up to 3% of the home's price in closing costs for you. If the seller has multiple offers, including ones that don't request seller concessions, you'll have a harder time getting them to agree to this.
How to qualify for a conventional loan
Conventional loans can be more difficult to qualify for than government-backed programs.
To give yourself the best shot at a conventional mortgage, follow these steps:
- Monitor and improve your credit: Get your free credit reports and dispute inaccurate entries. Make sure you pay your credit card bills on time to build a positive credit history and increase your credit score
- Pay down debts: Try to pay off any installment loans you may have, especially personal loans and auto loans, as well as high-balance credit cards to lower your debt-to-income ratio
- Save as much as possible: Money in the bank can make qualifying for a conventional loan a lot easier. Not only can you cover closing costs and a conventional loan down payment, but the lender will see you have a financial cushion and could still make payments if you lost your income due to a layoff or illness
- Get preapproved: When you've improved your status as a borrower, it's time to get preapproved with a lender. A preapproval tells you how much you'll likely be able to borrow, allowing you to begin your home search with an accurate idea of what you can afford
Conforming loan vs. conventional: What's the difference?
The term "conventional loans" refers to non-government backed mortgages. But there are different types of loans under the conventional category.
Conforming loans are a specific kind of conventional loan. They're called "conforming" because they conform to all of Fannie Mae's and Freddie Mac's guidelines, including credit score and DTI criteria. They also conform to conforming loan limits, which are set by the Federal Housing Finance Agency (FHFA) and cap the amount a lender can approve for a conforming loan in a given area.
What does this mean for you? If your conventional loan doesn't conform to all of Fannie's lending guidelines, you may end up needing a non-conforming loan, which increases your lender's risk and therefore may translate to a higher interest rate or a higher down payment requirement.
Jumbo loans are a good example of this. These loans exceed Fannie Mae's maximum loan size, so they're considered non-conforming loans. Qualified borrowers can get significantly higher loans than they would with a conforming loan, but they often need exceptional credit and more money down.