Explained: 5 Percent Down Conventional Loans

Are you wanting to buy a home but can't afford a high down payment? It is a common misconception that you must pay a 20% down payment when buying a home. But fortunately, that is not the case anymore. In fact, you can pay as little as 5% down. Want to know how? Let's talk about how 5% down conventional loans work and how you may be eligible.

The Problem with Rising Home Prices

Data has shown that over the past 40 years, home prices have risen a staggering 535%, each year growing higher than the last. With average salaries not increasing at the same rate, prospective homebuyers are struggling to even pay down payments. The solution? Conventional loans.

How Does a 5% Down Conventional Loan Work?

Conventional loans are uniquely provided through private lenders or government-sponsored enterprises, not guaranteed through a government agency. Because they are not insured through the government, they are a riskier loan to take on as an investor and, therefore, have slightly stricter requirements than other types of loans. A 5% loan lets the home buyer finance 95% of the cost of the home while only putting, you guessed it, 5% down. In most cases, private mortgage insurance (PMI) is required to protect the lender from borrower defaults. 

A conventional loan must meet the requirements for Fannie Mae or Freddie Mac to be insured. These government-sponsored mortgage entities buy mortgage loans so that banks can offer lower mortgage rates. These rates and requirements are reviewed yearly.

Benefits of a 5% Down Payment Conventional Loan

A conventional loan can be a great choice for a first-time homebuyer who may not have enough to pay the typical 20% down payment on a home. Here are some of the benefits of a 5% down conventional loan:

• Leverage your home appreciation
• Accessible homeownership
• Investment potential
• Faster buying for homeowners

Requirements for a 5% Down Payment Conventional Loan

To be eligible for a 5% down conventional loan, there are specific requirements that must be met. Although they change yearly, they typically include:

• Your DTI must be lower than 50%
• You need a credit score of 620 or higher
• You will need to pay for private mortgage insurance
• Your loan must fall within Fannie Mae or Freddie Mac loan limits
• Income and employment verification

Selecting the Right Lender

Are you ready to embark on your homebuying journey? Let us help you! Get in touch with Modern Leaning to see if you qualify for a 5% down conventional loan.