If you’re considering a conventional loan, one of the most pressing questions you likely have is, “How much do I need to put down?” After all, your down payment can significantly impact your mortgage terms, monthly payment, and even your ability to qualify for a home loan in the first place.
In this informative guide, we’ll break down the typical down payment requirements for conventional mortgage loans, explore factors that could influence this amount, and compare these options against other loan types like FHA and VA loans. Whether you’re a first-time homebuyer or looking to upgrade, understanding your down payment options is crucial to making the best financial decision.
Browse beautiful dream homes in your area
What is a Conventional Loan?
Conventional loans are a type of mortgage that is not part of a government-backed program. These loans are very popular, and in 2023, 73 percent of all homebuyers who purchased a new, single-family home used conventional financing, according to the US Census Bureau.
When applying for a conventional loan, it's essential to go through the prequalification process, which gives you an estimate of how much you might be able to borrow depending on the type of conventional loan you’re seeking.
Types of Conventional Loans
There are several different types of conventional loans available, each providing different characteristics and terms to homebuyers. Here are some of the most common types of conventional loans lenders offer:
- Fixed-rate mortgages: The interest rate of fixed-rate loans stays the same throughout the life of the loan.
- Adjustable-rate mortgage (ARM): The interest rate of an ARM changes during the life of the loan.
- Conforming loans: These conventional loans meet the borrowing limits set by Fannie Mae and Freddie Mac.
- Non-conforming loans: These conventional loans are sometimes called jumbo loans because they do not meet the borrowing limits set by Fannie Mae and Freddie Mac.
Benefits of Conventional Loans
The popularity of conventional loans is nothing new, as these mortgages offer homebuyers a variety of benefits. Conventional loans are widely available, as almost every private home lender offers them.
What’s the Minimum Down Payment Required for a Conventional Loan?
First-time buyers can get a conventional loan with as little as a three percent down payment. However, for most borrowers, the standard minimum down payment requirement for a conventional loan is five percent of the sales price. This minimum requirement can vary based on your financial situation and the type of property you’re purchasing.
- Multi-family homes: If the house you’re purchasing has a second unit, you may need to put down 15 percent to qualify.
- Second homes: If you’re purchasing a second home, you may need to put down at least 10 percent to qualify.
- Adjustable-rate mortgage: If you’re getting an ARM, you may need to put down five percent, even if you’re a first-time homebuyer.
What are the Other Requirements of a Conventional Loan?
Aside from the minimum down payment, conventional loans also carry several other requirements. These requirements include:
- Credit score: In most scenarios, you’ll need a credit score of at least 620 to qualify for a conventional loan.
- Debt-to-income ratio (DTI): Your DTI is the percentage that represents how much of your monthly income will go toward your monthly liabilities. The lower your DTI is, the better your chances of being approved by a lender will be. You’ll need a DTI of 50 percent or less to qualify for most conventional loans.
- Loan limits: The borrowing limit for conforming loans in 2024 is $766,550 for most areas of the United States. Higher-cost regions may have higher loan limits.
- Private mortgage insurance (PMI): Borrowers who put down less than 20 percent on a conventional loan must purchase PMI until they reach 20 percent equity on their investment.
How Does the Required Down Payment for a Conventional Loan Compare to Other Loan Types?
When deciding on a conventional mortgage, it's essential to consider how the required down payment compares to other loan options. Different types of loans—like those offered by the Federal Housing Administration (FHA) and the Office of Veterans Affairs (VA)—possess varying down payment requirements, making them potentially more or less accessible depending on your financial situation. Understanding these differences can help you choose the best loan for your needs.
Here’s how the down payment requirements of other loan types stack up to the five percent minimum associated with conventional loans:
- FHA loans: These loans are designed for first-time homebuyers and those with lower credit scores. FHA loans require a minimum credit score of 580 and a down payment of at least three and a half percent.
- VA loans: These loans are designed for veterans, active-duty service members, and direct family members. VA loans do not require a minimum down payment, meaning if you fall into one of the eligible groups, you could qualify for a VA loan even while putting down zero percent.
- USDA loans: Loans offered by the United States Department of Agriculture also have no minimum down payment requirement. However, eligibility requirements for these loans can be challenging as they are reserved for homebuyers in rural areas.
What are the Minimum Down Payment Requirements for a Non-Conforming Conventional Loan?
The minimum down payment requirements for a non-conforming or jumbo loan are also different from those of a conventional loan that follows Fannie Mae and Freddie Mac standards. In most cases, the minimum down payment required for a jumbo loan is at least 10 percent, with some borrowers needing to put down 20 percent or higher to qualify.
How Does the Size of a Down Payment Impact Mortgage Rates and Loan Terms?
If you decide to borrow a conventional loan, the size of your down payment will likely play a key role in determining your mortgage rates and loan terms. A larger down payment typically reduces the risk for mortgage lenders, resulting in more favorable terms for you as a borrower. On the other hand, smaller down payments may lead to higher interest rates and additional costs, such as PMI. Understanding how your down payment affects the overall cost of your loan is crucial for making an informed decision.
- Interest rates: Larger down payments usually lead to lower interest rates, while smaller down payments often result in higher interest rates as lenders take on more risk.
- Monthly payments: A larger down payment will immediately increase your home equity, likely lowering your monthly mortgage payment.
- Loan terms: A larger down payment may give you more flexibility with your repayment period, while a smaller down payment will likely extend your repayment period, resulting in higher cumulative interest.
What Are the Benefits and Drawbacks of Making a Larger Down Payment?
Making a larger down payment on a conventional mortgage can offer several advantages, such as lowering your interest rate and monthly payment and allowing you to avoid private mortgage insurance. However, it’s important to weigh the potential drawbacks of making a large down payment to better understand how both decisions could impact your financial situation moving forward.
Here are two of the most common disadvantages of making a large down payment:
- Less cash: Committing a large portion of your savings to a down payment can leave you with less money for other investments or home-related expenses such as improvements, renovations, and repairs. For example, if you also need to make an earnest money deposit, a large down payment could limit what you could offer the seller.
- Less flexibility: Tying up your funds in home equity can be viewed as an asset in many ways. However, it’s important to remember that home equity is not as easily accessible as a savings account or other investments.
Securing Your Dream Home
Understanding the down payment requirements of conventional loans is crucial when planning to buy a home. By knowing your options and how your down payment can impact factors like your interest rate and monthly payment, you'll be better equipped to make the right financial choice and secure your dream home.
At Century Communities, we offer beautiful, new-build homes in desirable locations across the country. Whether you're ready to buy or still exploring your options, our Find Your Home feature makes it easy to browse stunning properties in your area. Start your home search today and find the perfect fit for your lifestyle.
Conventional Loan Down Payment FAQ
Are there loan programs to help reduce the down payment requirement?
Yes, there are programs that help first-time buyers and other borrowers reduce the minimum down payment requirement of conventional home loans. A few of the more common programs are Fannie Mae’s HomeReady® and Freddie Mac's Home Possible® programs, each offering eligible borrowers conventional loans with a minimum down payment of three percent.
Is it hard to get a conventional loan?
The difficulty of qualifying for a conventional loan will depend on your financial situation. The minimum credit score requirement of conventional loans is higher than most other loan types, so you’ll need a credit score of at least 620 in most cases.
What is the best type of home mortgage?
The best type of home mortgage will depend on your financial situation. If you have a clean credit history and high credit score, a conventional loan may be the best loan type for you.