How Much Down Payment Do You Need for a Conventional Loan?

How much down payment do you need for a conventional loan? It depends on the type of loan you’re getting and the lender you’re working with. Read on to learn more.

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How Much Down Payment Do You Need for a Conventional Loan?

For most conventional loans you’ll need a down payment of at least 5%. This can come from your own savings, a tax refund, or a financial gift from relatives or close friends. You can also get a second mortgage from a private lender on top of your conventional loan. But keep in mind that this will add to your monthly payments and the total amount you’ll need to pay back.

The Benefits of a Conventional Loan

A conventional loan is a type of mortgage that is not backed by the government and therefore has no restrictions on the property you can purchase. You will need to put down a larger down payment than with other types of loans, but you will have more flexibility in choosing the home you want and won’t need to pay for private mortgage insurance (PMI).

One of the main advantages of a conventional loan is that you can put as little as 5% down, or even 3% down if you are a first-time home buyer. You can also avoid paying for PMI by putting down at least 20% of the home’s value as your down payment.

Another benefit of a conventional loan is that there are no maximum income limits, so even if you make a high income, you may still be able to qualify. Additionally, there are no minimum credit score requirements, so even if your credit score is not perfect, you may still be able to qualify for a conventional loan.

The Drawbacks of a Conventional Loan

The main drawback of a conventional loan is that if you were to put less than 20% down, you would have to pay Private Mortgage Insurance (PMI). This insurance protects the lender in case you were to default on your loan. The cost of PMI varies depending on the amount of your down payment, but it can range from 0.3% to 1.5% of the loan amount, annually. For example, if you took out a $250,000 loan with a 10% down payment, your PMI would be $250 per year or $20.83 per month.

How to Qualify for a Conventional Loan

To qualify for a conventional loan, most lenders will require you to have a debt-to-income ratio of no more than 43%. This means that your total monthly debts (including your housing payment) should use up no more than 43% of your monthly income.

In addition to having a enough income to qualify for the loan, you will also need to have a good credit score. Most conventional loans require a credit score of at least 620, although some lenders may require a higher score.

If you don’t have a high enough credit score or income to qualify for a conventional loan, you may still be able to get an FHA loan. FHA loans are government-backed loans that can be easier to qualify for than conventional loans.

How to Get the Best Interest Rate on a Conventional Loan

To get the best interest rate on a conventional loan, you’ll need to have at least 20% down. With that said, if you have at least 10% down, you can still get an attractive interest rate. Rates are lower with a larger down payment because it reduces the loan amount and lender’s risk. It also allows you to avoid paying for private mortgage insurance (PMI).

The Bottom Line

The minimum accepted credit score for most conventional loans is 620. Higher scores are needed for lower interest rates. For example, provided other conditions are met, borrowers with a credit score of 760 or above can qualify for a lower interest rate than someone with a score below 620. Lenders typically require that borrowers contribute a down payment of 3-20% of the purchase price of the home. The larger the down payment, the lower the risk to the lender and the better your chances of approval.