Last Updated on June 1, 2023 by Bob Filipczak
The conventional loan down payment has undergone a very unconventional transformation in the last couple of decades. Home prices went nuts, interest rates spiked and the traditional 20 percent down payment – which was the default throughout the mortgage industry – has been downsized. Now the answer to “how much of a down payment do I need for a conventional loan?” is: it depends.
Quick Conventional Loan Need to Knows
The first thing to know about conventional mortgage loans is that this is the loan most people get when they buy a house. Between 64% and 82% of all mortgages for homes are conventional. That’s why when people talk about mortgages, they are usually talking about conventional mortgages. Let’s delve into the world of conventional loans, focusing specifically on down payments. By understanding the ins and outs of conventional mortgage down payments, you can make informed decisions that align with your financial goals.
What is the current state of conventional loan down payments? The established number for the median* down payment on a home with a conventional loan is 13%, according to the National Association of Realtors. The median down payment, in terms of dollars, was $26,000 at the end of 2021. When we say “it depends” about down payments, we need to look at factors that influence those numbers one way or another.
For example, if you are between the age of 23 and 31 years, your median down payment lands at about 8%. First-time home buyers, too, tend to pay much less in down payments because mortgage lenders understand that they don’t have the resources to make big lump sum payments. The down payment is one indicator to the lender that you can afford a house, but there are many other factors that are just as important, such as income, employment, debt and credit score.
Likewise, if you are beyond 31 years of age, your down payments will probably be larger – 15% or more. Older home buyers have more resources and can get better deals (like lower interest rates) from lenders. They also typically have a house they are selling, which may give them a lump sum (equity) they can be put toward their next home.
That’s the long way of saying: don’t let the down payment for a home discourage you too much. There are a lot of options and resources that can make a conventional mortgage a reachable goal for you and your family.
*The median indicates a point where half of the down payments are above and half are below. It’s often more useful to look at a median number than an average.
What is a Conventional Loan?
A conventional loan is a type of mortgage that is not insured or guaranteed by the federal government, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). Instead, conventional loans are backed by private lenders, typically banks or mortgage companies. These loans offer flexibility in terms of loan amount, repayment period, and interest rates.
Government-backed loans that offer no-or-low down payments include:
The down payment for a mortgage essentially tells the mortgage lender that you are serious about acquiring the mortgage, and the home, and are a good risk. A conventional loan down payment will usually range from 3% to 20% of the purchase price. The amount required depends on various factors, including your creditworthiness, the loan type, and the lender’s specific requirements. Generally, a larger down payment may lead to better loan terms and lower monthly mortgage payments.
Who is Eligible for a Conventional Loan?
To be eligible for a conventional loan, you generally need a good credit score, a stable income, and a reasonable debt-to-income ratio (DTI). Lenders then evaluate your financial history to assess your creditworthiness and determine your eligibility.
Conventional Loan Requirements
To qualify for a conventional loan, you typically need to meet certain requirements, including:
- Credit Score: While specific requirements may vary, a higher credit score improves your chances of securing favorable loan terms. A minimum credit score of 620 is typically preferred.
- Income Stability: Lenders look for a consistent and reliable income source to ensure you can make your mortgage payments.
- Employment History: A stable employment history, typically two years or more, demonstrates your ability to maintain a steady income.
- Property Appraisal: The property you intend to purchase must undergo an appraisal to determine its value. Just remember an appraisal is the not the same as inspection. The appraisal looks at how much the property is worth in dollars and cents, while an inspection looks at how the house is put together and how safe it is.
- Debt-to-Income Ratio (DTI): DTI is a key factor lenders consider when evaluating your loan application. It measures the percentage of your monthly income that goes toward debt repayment. Conventional loans typically require a DTI ratio below 43%, although some lenders may offer flexibility based on other factors.
Private Mortgage Insurance (PMI)
PMI is an insurance policy that protects the lender in case the borrower defaults on the loan. It is generally required for conventional loans with a down payment of less than 20% of the purchase price. If you have a 20% down payment, you can avoid mortgage insurance premiums, which is one of the reasons buyers will try to hit that mark. The average monthly payments for private mortgage insurance are between $125 and $375, so it adds up.
After a few years, once you have built sufficient equity in your home, you may be able to request the cancellation of PMI.
Conforming Loans vs Non-Conforming Loans
Conforming loans are conventional loans that adhere to the guidelines set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. Your mortgage lender will only “own” your loan for a while. Eventually, they probably sell your mortgage to either Fannie or Freddie, which is why these two entities get to set conforming loan limits. Their guidelines specify loan limits and other requirements that determine if a loan qualifies as a conforming conventional loan. Non-conforming loans, often referred to as jumbo loans, exceed the loan limits established by Fannie and Freddie.
Jumbo loans are non-conforming loans that exceed the loan limits established by the GSEs. These loans are often used for high-value properties. Since they present higher risk to lenders, jumbo loans generally have stricter requirements, including larger down payments and higher credit scores. In 2023, single-family homes that cost more than $726,200 will require a non-conforming jumbo loan. In high-cost areas like New York City or San Francisco, the jumbo loan is set higher, at $1,089,300.
The Conventional 97 loan program is designed to assist first-time buyers by requiring a down payment as low as 3%. For those who may not have substantial savings this may be the lowest down payment for conventional loan you can get. There are four of them.
- Fannie Mae HomeReady Loans are for buyers with lower incomes who have a credit score of at least 620 and who complete homebuyer counseling.
- Fannie Mae 97% LTC Standard Loans help first-time homebuyers with credit scores of 620 or higher.
- Freddie Mac Home Possible Loans are available for those with credit scores of 660 or higher, who live in underserved areas, or whose income is below a set limit.
- Freddie Mac Home One Loans are for first-time homebuyers who enroll in and complete homebuyer education. These loans are available for single-unit homes that will be the primary residence for the homebuyer.
Homes for Heroes: Conventional Financing For Community Heroes
Conventional loan programs offer flexibility and a range of options for homebuyers. By working closely with a knowledgeable lender, you can find the right conventional loan and down payment strategy that suits your needs and enables you to achieve your dream of homeownership.
That’s where Homes for Heroes can help. In addition to pairing you with a local real estate specialist, we also have a local mortgage specialists who can help you find exactly the right loan for your needs.
Homes for Heroes mortgage specialists are committed to assisting community heroes; include military service members, veterans, firefighters, EMS professionals, teachers and educators, healthcare professionals, and the law enforcement community; and saving them money at closing by reducing their lender fees. After closing on a new home with our real estate specialist, we will send you a Hero Rewards® check. The average savings received by the heroes we assist is $3,000.
This is our way of saying “thank you for your service.” Let us help you buy your next home, sell your current home, and handle your mortgage needs. It would be an honor to serve you.