What is the Lowest Down Payment for a Conventional Loan?

Are you searching for a mortgage option that offers the lowest possible monthly payments? Look no further than a conventional loan. In this article, we will explore how a conventional loan can provide you with a pathway to homeownership while keeping your monthly payments affordable. From the flexible down payment options to competitive interest rates, a conventional loan offers a range of benefits that can help you achieve your homeownership dreams without stretching your budget.

What are conventional loans?

Conventional loans are mortgages that lack the backing or insurance of a government organization like the Federal Housing Administration (FHA), Veterans Administration (VA), or United States Department of Agriculture (USDA). Private lenders such as banks, credit unions, and mortgage companies typically offer these loans.

Conventional loans typically require a higher credit score and a larger down payment than government-backed loans. Borrowers with good credit and a sizable down payment can often obtain better interest rates and terms with a conventional loan than with a government-backed loan.

Conventional loans can be used to purchase or refinance primary residences, second homes, and investment properties. They are available in fixed-rate and adjustable-rate options and can have a variety of term lengths, ranging from 10 to 30 years.

Overall, conventional loans offer borrowers flexibility and options regarding loan type, term length, and interest rate but typically require a higher credit score and a larger down payment than government-backed loans.

Who offers conventional loans?

Banks, credit unions, and mortgage companies are examples of private lenders who typically offer conventional loans. These lenders evaluate the borrower's creditworthiness and ability to repay the loan based on their credit score, income, employment history, and other factors.

Conventional loans do not have a government agency backing them, in contrast to government-backed loans like FHA, VA, and USDA. This means that the lender takes on the risk of the loan and may require a higher credit score, a more extensive down payment, and stricter underwriting guidelines to qualify for the loan.

Many lenders offer conventional loans, including large national banks, community banks, credit unions, and online lenders. Borrowers must shop around and compare rates and terms from different lenders to find the best option.

Conventional Minimum Down Payment Programs:

Four conventional loan programs only require a 3% down payment, and the down payment can be "gifted" by a family member. We'll discuss gift funds later in this article. But let's start with the 3% down payment programs:

Conventional 97:

The Conventional 97 loan program is an excellent option for homebuyers who want to purchase a home with a low down payment. This program allows borrowers to put down as little as 3% of the home's purchase price, making homeownership more accessible for those who may not have a large amount of cash.

The Conventional 97 loan program is available through many private lenders and is backed by Fannie Mae, making it a safe and reliable option for borrowers. With no upfront mortgage insurance premium and lower monthly mortgage insurance payments than FHA loans, the Conventional 97 loan program can save borrowers money over time.

Additionally, the program has flexible credit score requirements, making it an excellent option for borrowers with less-than-perfect credit. Overall, the Conventional 97 loan program is attractive for homebuyers looking to purchase a home with a low down payment and competitive terms.

Credit score: 620 minimum
Debt-to-income ratio: 43%
PMI required
First-time home buyers are required.

HomeReady:

The Home Ready loan program is an excellent option for homebuyers who want to purchase a home with a low down payment and competitive interest rates. This program is specifically designed for low- to moderate-income borrowers, providing flexible credit requirements and a low down payment requirement of just 3%.

Due to Fannie Mae's backing, Home Ready is a dependable and safe option for borrowers. One of the unique features of this program is that it allows for non-borrower household income to be considered, providing additional support for those who may have family or roommates contributing to their household expenses.

Additionally, the program offers reduced mortgage insurance premiums and allows for lower minimum credit scores compared to traditional conventional loans. With its affordable terms and flexible requirements, the Home Ready loan program is an excellent choice for homebuyers struggling to meet standard conventional loan requirements.

Credit score: 620 minimum
Debt-to-income ratio: 43%
PMI required
No first-time home buyers are required.
The borrower's income must be less than 80% of the median income.

HomeOne Loan

The Home One loan program is excellent for first-time homebuyers seeking a low-down payment option. This program allows borrowers to put down as little as 3% of the home's purchase price, making homeownership more accessible to those who may not have a large amount of cash.

Due to Freddie Mac's backing, Home One is a trustworthy and safe option for borrowers. This program has flexible credit requirements, making it an excellent option for borrowers with less-than-perfect credit.

Additionally, the program offers reduced mortgage insurance premiums, saving borrowers money over time. With its affordable terms and low down payment requirement, the Home One loan program is an excellent choice for first-time homebuyers looking to make their dream of homeownership a reality.

Credit score: 620 minimum
Debt-to-income ratio: 43%
PMI required
First-time home buyers are required (at least one borrower must be a first-time home buyer).
No income limits!

Home Possible

The Home Possible loan program is an excellent option for low- to moderate-income borrowers who want to purchase a home with a low down payment. Freddie Mac backs this program and offers flexible credit requirements, making it an excellent option for borrowers with less-than-perfect credit.

The Home Possible loan program allows borrowers to put down as little as 3% of the home's purchase price, making homeownership more accessible to those who may not have a large amount of cash. The program also offers reduced mortgage insurance premiums, saving borrowers money.

Additionally, the Home Possible loan program allows for non-borrower household income to be considered, providing additional support for those with family or roommates contributing to household expenses. With its affordable terms and flexible requirements, the Home Possible loan program is an excellent choice for borrowers struggling to meet standard conventional loan requirements.

Credit score: 660 minimum
Debt-to-income ratio: 43%
PMI required
First-time and repeat home buyers,
The total income of all borrowers must not exceed 80% of the median income in the area.

Gift Funds

The programs listed above permit gift funds for down payments, closing costs, and prepaid expenses.

The gift money must come from a family member, an employer, a close friend, or a charitable organization. The donor must provide a gift letter stating that the money is not a loan and must not be repaid. The gift letter must also include the donor's name, address, telephone number, the donor's relationship to the borrower, the amount of the gift, and the date the funds were given. The funds must be deposited into the borrower's bank account or escrow account before settlement.

Grant Programs:

Freddie Mac BorrowSmart

$1,000–$2,500 for eligible borrowers
Through its BorrowSmart program, the Federal Home Loan Corporation (Freddie Mac) offers credit to prospective homeowners with modest incomes that can be applied to the down payment.
Read more

Fannie Mae

Fannie Mae offers a similar program but does not have a name currently.

Alternative low-cost loan programs:

FHA

Credit score of 500 with a 10% down payment. 580 and higher for a 3.5% down payment
Debt-to-income ratio: 57% maximum
MIP is required (comparable to PMI).
No first-time requirement
NO area requirement
No income limits
Lower loan limits than conventional loans
Read more

USDA

No minimum credit score: the lender determines the minimum credit score.
Debt-to-income ratio: 36% maximum
MIP is required (comparable to PMI).
No first-time requirement
Area requirement
Income limits
Read more

VA

No minimum credit score: the lender determines the minimum credit score.
Debt-to-income ratio: 41% maximum
Upfront funding fee (exemptions for Purple Heart recipients and disability income)
No MIP or PMI
No first-time requirement
Area requirement
No income limits
Read more

Conclusion

In conclusion, a conventional loan provides a viable solution for homebuyers looking to minimize their monthly mortgage payments. With various down payment options and competitive interest rates, this loan type offers flexibility and affordability. By working with a trusted mortgage professional and exploring the available conventional loan programs, you can find the lowest payment option that aligns with your financial goals. Don't let high monthly payments hold you back from owning a home – consider a conventional loan and take the first step towards affordable homeownership.

SOURCE: