When a 3%, 5%, or 10% conventional loan down payment is smarter
What You’ll Learn
How common low down payment conventional loans are
Reasons why a 3%, 5%, or 10% down payment is smarter
How a 10.01% down payment could help you buy a home in an expensive area
Housing prices are rising across the country, and low down payment mortgages make it easier for first-time homebuyers to enter the housing market sooner. Instead of waiting, saving, and continuing to pay rent to your landlord, with a low down payment and a good credit score, you may be able to buy that house you want right away. Ultimately, your down payment amount and the type of mortgage you qualify for come down to your finances and your credit score.
What’s the minimum down payment for a conventional loan?
If the title of this article didn’t give it away, the minimum down payment you can make for a conventional loan is 3%. Most lenders add private mortgage insurance (PMI) fees to your monthly mortgage payments when your down payment is less than 20%, but that hasn’t deterred most Americans. In fact, 75% of first-time homebuyers put less than 20% down.
Why a 3% down conventional loan can be a smart choice
- First-time homebuyers—and people who haven’t owned a home in the last 3 years—can enter the housing market sooner
- Instead of building your landlord’s home equity, you can start building yours
- You can buy a primary residence before rising property values price you out of the market
With a 3% down payment, first-time homebuyers can qualify for fixed-rate mortgages up to $625,000 (in most areas) for single-family homes, condos, townhouses, and planned unit developments (PUD). As the down payment is less than 20%, you’ll likely need to pay PMI until your home equity reaches at least 20%.
Why a 5% down conventional loan can be a smart choice
- You can choose between an adjustable-rate mortgage (ARM) or a fixed-rate mortgage
- This slightly larger down payment may prompt lenders to offer you a lower interest rate
- Instead of spending all your cash on a down payment, you may be able to keep some for emergencies
If you owned a home within the last 3 years, the lowest down payment you can make for a conventional loan is 5%. A key benefit of making a 5% down payment is that you’ll qualify for an adjustable-rate mortgage (ARM). These types of mortgages can help you save money in the long run if you plan to sell the home within 10 years. You see, the first 5-, 7-, or 10-years of an ARM has a low introductory fixed interest rate. When this introductory period ends, the interest rate adjusts twice a year—sometimes it goes up, sometimes down.
Often the introductory fixed interest rate of an ARM is lower than the interest rates offered for traditional fixed-rate mortgages. If you plan to buy a starter home, then buy a larger one before the ARM introductory fixed interest rate ends; an ARM can be a smart choice for you.
Homebuyers with 5% down can qualify for fixed-rate mortgages and adjustable-rate mortgages for single-family homes, condos, townhouses, and planned unit developments (PUD). As the down payment is less than 20%, you’ll likely need to pay PMI until your home equity reaches at least 20%.
Why a 10% down conventional loan can be a smart choice
- A larger down payment may mean a lower interest rate and smaller monthly payment
- You’ll pay PMI for less time than homebuyers who put 3% or 5% down
- You can use the mortgage to buy a second home
In 2020, the average first-time homebuyer bought their first home with a down payment of just 7%, so by making a down payment of 10%, you’re already ahead. And with a larger down payment, your mortgage will be smaller, so you’ll have to pay less each month (compared to a mortgage of the same length and interest rate with a smaller down payment).
See how down payment amounts affect monthly costs with this mortgage calculator.
With a 10% down payment, homebuyers can qualify for fixed-rate and adjustable-rate mortgages up to $548,250 (in most areas) for single-family homes, condos, townhouses, and planned unit developments (PUD) for both primary and secondary residences. As the down payment is less than 20%, you’ll likely need to pay PMI until your home equity reaches at least 20%.
For homebuyers in especially costly areas—think San Francisco or Hawaii—if you’ve got a down payment of 10.1% and an excellent credit profile, you may be eligible for a jumbo loan. However, lenders require homeowners who apply for jumbo loans to have between 18 to 24 months of asset reserves, a credit score of at least 700, and a debt to income ratio of 43%.
You may be ready to buy sooner than you think
You’re already thinking about how much you can afford for a down payment. The next step is finding how much home you can buy. In as little as 3 minutes, you can get pre-approved with Better Mortgage and know the homebuying budget you have to work with.