The idea that you need to put 20% down to get a conventional loan for a home mortgage is largely a relic of the past. The down payment can be a significant obstacle for many home buyers, especially anyone saving for their first home.
While there are still advantages to a higher down payment, Quicken Loans offers an option that allows both first-time and repeat home buyers to get into a new home with as little as 3% down and some that require as little as 5% down.
If you’re looking to buy a home, this could be a great option for you. Let’s go over the details.
3% Down Payments
This option allows home buyers to get into a home with as little as 3% down for a single-family home used as a primary residence.
You have to have a median FICO® credit score of 620 or higher. If you have a higher credit score, great. That’s one of the things that can help you obtain a more favorable interest rate.
In general, you want to keep your debt-to-income (DTI) ratio – which compares monthly revolving and installment debts against income – as low as possible in order to give yourself the opportunity to qualify for the most loan options. Every loan is different, but 43% is a good DTI guideline.
This loan option, offered as a conventional loan, requires you to have income that’s no greater than the area’s median (in most areas). If you’re in a low-income area, limits may not apply.
If we check and your income doesn’t match up with the requirements of this program, we can keep looking until we find another option for you.
If you’re looking to get a multi-unit property to live in one unit and rent out the others, you can purchase a two-unit property with as little as 5% down. If you would like to purchase a 3- to 4-unit property, it will require a 20% down payment.
If you need to refinance an existing 3- to 4-unit home, you need to leave 20% equity in the home.
The normal loan limit for a typical conventional loan is $453,100. If you live in certain high-cost areas of the country, it’s possible you’ll need more money than that to get into a home.
For those areas that have higher property values, you can start the home buying process with as little as a 5% down payment.
Conventional vs. FHA Loan Options
Let’s wrap up this article by talking about these options in relation to another popular low down payment option: the FHA loan. FHA loans require a slightly higher down payment of 3.5% versus the 3% you can get with a conventional loan.
FHA loans have their advantages. From a credit perspective, you can qualify for this loan through Quicken Loans with a median FICO Score as low as 580. With a higher credit score, you can qualify even if you have slightly more debt and a higher DTI ratio.
In addition to a lower down payment, conventional loans from Fannie Mae and Freddie Mac have other advantages. To start with, on an FHA loan, if you pay only the minimum down payment, mortgage insurance sticks around for the life of the loan. Whereas, on a conventional loan, mortgage insurance can come off once you reach 20% equity in your home (verified by reappraisal).
You can also avoid a monthly mortgage insurance payment altogether by taking a look at a lender-paid mortgage insurance (LPMI) alternative like PMI Advantage: You can make a full or partial pay off of your mortgage insurance policy at closing in order to secure a standard interest rate. On the other hand, you can choose to lock a slightly higher rate (compared to another loan with a monthly mortgage insurance payment) but avoid monthly premiums altogether. If you need a primer, here are the important things to know on conventional mortgage insurance.
If any of these loan options sound right for you, you can get started online with Rocket Mortgage® by Quicken Loans or give one of our Home Loan Experts a call at (800) 785-4788. If you have any questions, let us know in the comments below.
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