You can buy a house with a 5% down conventional loan, and, despite PMI, it could be less expensive in the long run than saving up 20%.
Are you among the many aspiring homeowners who have been told that you need a whopping 20% down payment to buy your dream home? If so, youre not alone. The myth of the 20% down payment has been circulating for years, leaving potential buyers feeling discouraged and stuck in the rent cycle.
But heres the good news: you dont need to wait until you have 20% saved up. In fact, a 5% down payment through a conventional loan could be your key to homeownership. Lets dive in and explore why this may be the right path for you.
If you’re looking to buy a home with a conventional mortgage loan, you may be wondering why you need to put down at least 5% of the purchase price as a down payment This article will explain the reasons behind the 5% down payment requirement for conventional loans, as well as provide tips for saving up your down payment and ensuring a smooth home buying process
What is a Conventional Loan?
A conventional loan is a mortgage that is not insured or guaranteed by the federal government. Conventional loans are issued by private lenders like banks, credit unions, mortgage companies and other financial institutions.
The most common types of conventional loans are conforming loans which adhere to the underwriting guidelines set by Fannie Mae and Freddie Mac. These agencies establish the standards for debt-to-income ratios credit scores, down payments and loan limits that lenders must follow to sell loans to them.
Why is a 5% Down Payment Required?
Lenders require a minimum down payment of 5% on a conventional loan for a few key reasons:
To lower their risk: By requiring a down payment from borrowers, lenders reduce their risk that could come from a mortgage default. If the borrower stops making payments, the lender can take the home through foreclosure and recover their losses easier if there is equity in the property. With a larger down payment, there is less chance the mortgage balance will exceed the home value.
To show borrower commitment: A down payment represents the borrower’s financial stake in the home. Putting 5% down shows the lender that the borrower is invested in the property and less likely to walk away if home prices decline or personal finances get tight.
To avoid private mortgage insurance (PMI): On conventional loans with less than 20% down, private mortgage insurance is required. PMI protects the lender in case the borrower defaults. With a 5% down conventional loan, PMI costs about 0.5% – 1% of the loan amount per year. Going with a 5% down payment allows borrowers to avoid the even higher PMI costs that come with a 3% down payment.
To qualify for better rates/terms: In general, larger down payments allow borrowers to qualify for lower mortgage interest rates and better loan terms. A 5% down payment balances lower rates with a more manageable upfront cash requirement compared to a 10 or 20% down payment.
Tips for Saving for a 5% Down Payment
Coming up with even 5% of the purchase price for a down payment can be a challenge for many buyers. Here are some tips to help you reach your down payment goal faster:
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Make a budget: Track your monthly income and expenses so you can find areas to cut back on, allowing you to save more each month. Setting up automatic transfers to your down payment savings account helps.
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Reduce debt: Pay down credit cards, auto loans and other debts to free up monthly cash flow.
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Save windfalls: Use tax refunds, bonuses, gift money, and other unexpected sources of cash to grow your down payment savings quickly.
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Choose an affordable home: Consider lowering your purchase price to align with a 5% down payment you can manage.
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Explore down payment assistance: Look into down payment assistance programs offered by non-profits, employers, or your state/local government. These programs provide grants, loans, or secondary financing to cover some of your required down payment.
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Get a side gig: Bring in extra income from a side job to put solely toward your down payment goal.
Qualifying for a 5% Down Conventional Loan
To qualify for a conventional mortgage with 5% down, you’ll need:
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A minimum credit score of 620, but scores of 740+ get the best rates/terms
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A debt-to-income ratio below 45%
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Verified employment and income to show you can afford monthly payments
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Homebuyer education may be required for first-time buyers
Be sure to check your credit reports for errors that could be lowering your scores. Pay all bills on time going forward to keep your credit profile strong.
Shopping with multiple lenders helps you find the most competitive rates/fees. Getting pre-approved early in the home buying process also sets you up for success.
The Benefits of 5% Down on a Conventional Loan
Some key benefits of putting 5% down on a conventional mortgage include:
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Greater affordability: 5% down opens homeownership to more buyers who can’t afford 20% down but have moderate savings.
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Lower monthly payments: A smaller down payment results in lower principal/interest payments compared to larger down payments. This improves overall affordability.
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Competitive rates: While rates are often best with 20% down, 5% down payment buyers can still get relatively low interest rates, especially with good credit.
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No mortgage insurance with 20% equity: Once you reach 20% home equity through monthly payments or appreciation, you can request PMI cancellation with a 5% down loan.
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Potentially faster home buying: You can purchase sooner rather than waiting years to save up 20% down, which is difficult with rising home prices.
Alternatives to 5% Down on a Conventional Loan
If you’re having trouble saving up a 5% down payment, here are a couple options to consider:
FHA loan: Requires just 3.5% down and is more lenient on credit scores/debt ratios. However, FHA loans have mortgage insurance for the full loan term.
VA loan: No down payment is necessary if you qualify based on military service. VA loans also don’t charge monthly mortgage insurance.
USDA loan: Offers 100% financing if buying in designated rural/suburban areas. Credit and income limits apply.
Down payment assistance programs: These provide grants, loans, or secondary financing to cover some or all of your required down payment. Availability depends on your location/situation.
Low down payment conventional programs: Some conventional loans allow down payments as low as 3% or 3.5%, but you’ll need excellent credit/income to qualify.
The Bottom Line
While putting at least 5% down is required on a conventional home loan, this option gives you a middle ground – more affordable than 20% down but lower risk than 3.5%. For buyers who don’t quite qualify for no-down payment programs, 5% down on a conventional mortgage can be the right choice to finance your home purchase.
Is a 5% Down Conventional Loan For You?
It’s true that saving 5% down is no small feat in this housing market, where the average U.S. home price is well north of $400,000.
However, it’s more realistic than trying to save 20% and gives renters hope of owning someday. The 5% down payment conventional loan option might be that motivation for you.
About The Author:
Tim Lucas began his mortgage career in 2001 at Washington Mutual, reviewing wholesale loan files submitted by mortgage brokers. In the mid-2000s, he transitioned to retail lending at M&T Bank as a Mortgage Loan Processor, working with a wide range of borrowers: first-time buyers, investors using now-notorious “option ARMs” and jumbo buyers financing $1–5 million homes.
Tim later launched his own loan processing company while originating loans for his own clients, mainly FHA and USDA loans for first-time buyers. When the 2008 housing crash hit, he pivoted to assisting a prominent Loan Officer at Seattle Mortgage and Golf Savings Bank. He eventually became a Mortgage Processing Supervisor at Mortgage Advisory Group. There, he earned a reputation as a solutions-oriented processor, known for solving complex loan scenarios and uncovering obscure guidelines to help clients get approved.
In 2013, after more than a decade in lending, Tim moved into mortgage education—creating trusted content for sites like MyMortgageInsider.com and TheMortgageReports.com. Today, he blends 10+ years of hands-on mortgage experience with another decade in consumer education at Three Creeks Media, where he leads MortgageResearch.com. Tim is also a licensed Loan Originator (NMLS #118763).
Ready to start your homebuying journey?
Conventional loans come in all shapes and sizes and offer the flexibility to finance just about any real estate transaction, from purchasing your dream home to refinancing and renovating a multifamily investment property.
The seller can pay all or part of your closing cost bill on a conventional loan, but there are limits.
Requirements for a 5% Down Payment Conventional Loan
You might think that getting a home loan at less than 20% is too difficult. However, requirements are not that much more stringent than if you were making a large down payment.
The “Conventional 95” as it’s sometimes called are available even to those without a perfect homebuyer profile.
1. Private mortgage insurance (PMI): You’ll need private mortgage insurance with a 5% down payment. The cost for a $300,000 home loan can vary from $76 per month for a 760-credit-score buyer all the way up to $439 per month for someone with a 620 score. Homebuyers with lower credit should see if an FHA loan offers a lower payment.
2. Credit score: While you dont need a perfect credit score, a higher score will help you secure better terms. Typically, a score of 620 or higher is required for conventional loans, but keep in mind mortgage insurance gets expensive with a lower score.
3. First-time buyer considerations: Fannie Mae recently unveiled lower mortgage rates for moderate-income first-time buyers. You don’t have to be a first-time buyer unless you’re putting down 3% and using certain conventional programs.
4. Homeownership education: While a homeownership course isn’t typically required when putting 5% down, it’s a good idea if you’ve never owned before.
5. Income and employment verification: Lenders will assess your income and job stability to ensure you can meet your monthly mortgage payments. Typically, about 36% of your gross income can go toward your full housing payment, including taxes, insurance, and HOA dues. About 45% of your gross income can go toward housing plus all other debts. Income limits don’t apply for 5% down conventional loans.
6. Property types: Not all properties are eligible for conventional loans. They must be residential in nature and in good condition. Most condos and single-family homes are eligible. In 2023, Fannie Mae lowered its down payment requirement to just 5% from 15-25%.
7. Occupancy requirements: Youll need to live in the property as your primary residence for at least the first 12 months.
Conventional Loan – 5 Down?
FAQ
Do conventional loans require 5% down?
Most conventional loans require a minimum down payment of 5%. However, a few options allow for as little as a 3% down payment.Feb 20, 2025
Can conventional loans be 3% down?
Down payment: It’s possible for first-time home buyers to get a conventional mortgage with a down payment as low as 3%.
Is it better to put 3 or 5 percent down on a house?
3% down will always give you a higher interest rate on a conventional loan as it’s more risky for the investor. You’ll get a better rate with at least 5% down. You’re basically doing a home ready/home possible loan.
What is the downside of a conventional loan?
A conventional loan’s main downsides are stricter qualification requirements, potentially higher interest rates, and the need for a larger down payment, especially if you want to avoid Private Mortgage Insurance (PMI).