Conventional loan: 3% down, PMI and credit scores

The conventional loanconventional loanA conventional loan is any mortgage that is not insured or guaranteed by the federal government: it is not FHA, VA or USDA. The lender, or the companies that buy the loans (Fannie Mae and Freddie Mac), carry the risk. When the amount is within the conforming loan limit the loan is called "conforming"; above it, it is a "jumbo" loan. It usually asks for a higher credit score than an FHA loan and, if your down payment is less than 20% of the price, you are normally required to buy private mortgage insurance (PMI) until you build enough equity in the home.See the full definitionClose is the most common kind of mortgagemortgageA mortgage is an agreement between you and a lender (a bank, a credit union or a mortgage company) that gives the lender the right to take your property if you do not repay the money it lent you, plus interest. Mortgage loans are used to buy a home or to borrow money against the value of a home you already own. You repay it in monthly payments that cover the principal (the money borrowed) and the interest, and often the property taxes and insurance as well. In Spanish, "hipoteca" and "préstamo hipotecario" mean the same thing.See the full definitionClose, and it does not always require 20% down. Using the rules Fannie Mae, Freddie Mac and federal law publish, this guide explains how much down paymentdown paymentThe down payment is the part of the home's price you pay out of your own pocket when you buy; the loan covers the rest. In U.S. Spanish it is also called enganche, cuota inicial or entrada. Each loan type has its own minimum: FHA requires at least 3.5% of the value, VA and USDA loans may require none, and conventional loans ask for more if you want to avoid private mortgage insurance. A larger down payment lowers the loan, the monthly payment and the total interest; many state programs help families put it together.See the full definitionClose you need, what credit score lenders look for, how much you can borrow, how private mortgage insurance (PMI) works and when it comes off.

Down payment where HomeReady and Home Possible start

3%³

Minimum score on a fixed rate, if the loan is underwritten by hand

620⁶

Above this loan-to-value ratio, mortgage insurance is required

80%⁸

Of the original value, where PMI ends on its own if you are current

78%¹¹

What a conventional loan is

“Conventional” just means the loan is not part of a government program such as FHA, VA or USDA. According to the CFPB, these loans typically cost less than FHA loans but can be harder to get.¹

There are two broad groups:

• Conforming loans. They have a maximum amount set by the government, and their other rules are set by Fannie Mae or Freddie Mac, the companies that back these loans.¹ By law, both can only buy loans below that amount.²
• Non-conforming loans, such as the jumbo loanjumbo loanA jumbo loan is a mortgage whose amount is above the conforming loan limit. That limit is the most that Fannie Mae and Freddie Mac (the two companies that buy mortgages from lenders) are allowed by law to purchase. It is set every year with their regulator, the Federal Housing Finance Agency (FHFA), and it is higher in high-cost counties. A loan may go over the limit, but then it is called a jumbo loan. The CFPB notes that a jumbo loan may cost more to get than a conforming loan, and it must meet special requirements to count as a Qualified Mortgage (QM).See the full definitionClose. With jumbo loans, each lender sets its own rules, and they usually require good credit and a high down payment.¹

Conventional or FHAFHA loanAn FHA loan is a mortgage made by a private lender and insured by the Federal Housing Administration (FHA), an agency of the U.S. government. That insurance protects the lender if you stop paying, which is why the lender can accept a lower down payment and a less-than-perfect credit history than on a conventional loan. Federal law sets the minimum cash investment at 3.5% of the property's value and caps the loan amount at the FHA limit, which changes by county. In exchange for the insurance you pay a mortgage insurance premium.See the full definitionClose? It depends on your credit and your savings. According to the CFPB, private mortgage insurance on a conventional loan varies with your down payment and score, and for borrowers with good credit it is generally cheaper than FHA’s; it can also be cancelled under certain circumstances.¹⁰ The FHA loan guide covers the other option, and the CFPB advises not deciding before you have your official Loan Estimates.¹

How much you can borrow: the conforming limit

By law, Fannie Mae and Freddie Mac can only buy loans below an amount called the conforming loan limitconforming loan limitThe conforming loan limit is the maximum mortgage amount Fannie Mae and Freddie Mac may buy from lenders. Those two companies back most conventional loans, so a loan within the limit ("conforming") usually gets better terms than a larger one ("jumbo"). The Federal Housing Finance Agency (FHFA) sets it every year using the formula in the HERA law, and high-cost areas have a higher limit. Each county's FHA loan limit is computed from this number.See the full definitionClose. Above it, the loan is a jumbo loan. A 2008 law known as HERA set a permanent formula to calculate it, and four high-cost areas (Alaska, Hawaii, Guam and the U.S. Virgin Islands) have higher limits.²

In the data we publish, the limit for a one-unit home ranges from $832,750 in the lowest-cost counties to $1,299,500 in the highest-cost ones. Look up your county on our conforming loan limits page. If the loan you need is above that limit, you are in jumbo territory: compare the rules of several lenders.¹

Low down payment: HomeReady and Home Possible

You do not need 20% for a conventional loan. Fannie Mae and Freddie Mac have programs for low- and moderate-income buyers that start at 3%.³⁵

HomeReady (Fannie Mae). It is a conventional loan with more flexible rules for borrowers who meet an income limit: your yearly income cannot exceed 80% of the area median income (AMI)area median income (AMI)The area median income (AMI) is the median family income of an area, which HUD computes every year for each metropolitan area and county. Housing programs use it as the yardstick: under the federal rule, a family is low-income when it earns no more than 80% of its area's median income and very low-income when it earns no more than 50%, adjusted for family size. State down payment assistance programs and Section 8 vouchers publish their limits as a percentage of AMI, so the same salary can qualify in one county and not in the next.See the full definitionClose where the home is. It works for a one- to four-unit home you will live in. To finance more than 95% (up to 97%), the loan must be a fixed rate for 30 years or less, on a one-unit home, and underwritten with DU, Fannie Mae’s automated system. If everyone who will live in the home is a first-time buyer, a homebuyer education coursehomebuyer education courseA homebuyer education course is a class with a set curriculum that covers the homebuying process, how to maintain a home, budgeting and why good credit matters. It can be in a group, in person, online or by phone. It is not the same as housing counseling, which is one-on-one help with an action plan for your situation. Some loans and some down payment assistance programs require you to finish a course before closing, especially first-time homebuyers. When you finish, you get a certificate.See the full definitionClose is required.³ If the loan is underwritten by hand, the maximum drops to 95%.⁴

Home Possible (Freddie Mac). It is a low down payment mortgage for low- and very low-income borrowers: a 3% down payment, income of up to 80% of AMI and a maximum of 97% of the value on a one-unit home. The down payment can come from family, employer programs, a secondary assistance loan or your own work on the home (sweat equity). Freddie Mac has a tool to check each property’s income limit.⁵

HomeReady and Home Possible, side by side

Fannie Mae

HomeReady

• From 3% down, with a fixed rate on a one-unit home.³
• Income of up to 80% of the area median income.³
• Rent paid by people who live with you can count as income, up to 30%.⁴
• Homebuyer education if everyone is a first-time buyer.³

Freddie Mac

Home Possible

• A 3% down payment, from several sources, including your family.⁵
• Income of up to 80% of the area median income.⁵
• Up to 97% of the value on a one-unit home.⁵
• The insurance can be cancelled once the balance drops below 80% of the appraised value.⁵

Your lender decides which one it offers: ask about both and get a Loan Estimate for each.²⁰

Example with real numbers

The down payment on a typical home with a conventional loan

With the typical US home value.

Home price (typical US value)

$332,700

Minimum down payment with HomeReady or Home Possible (3%)

$9,981

Down payment to avoid PMI (20%)

$66,540

This is an example with national numbers.³ With less than 20% down you pay PMI, but you can ask to remove it later.⁹ See how long it would take you to save with your own numbers.

Run it with your numbersDown payment savings plan

Credit score and debts

Your score. Fannie Mae sets the minimum based on how your loan is underwritten. If it is underwritten by hand (manual underwritingmanual underwritingManual underwriting is when the lender evaluates your mortgage application by reviewing your credit, income, savings and debts itself, instead of relying on an automated system's recommendation. Fannie Mae allows both: its automated system (Desktop Underwriter) or manual underwriting. For FHA loans, HUD requires manual underwriting when the automated system returns a “Refer” or the file must be downgraded to a manual review, and also for borrowers with no credit score who use nontraditional credit. The rules can be stricter: at Fannie Mae, the maximum debt-to-income ratio is lower.See the full definitionClose), it requires at least 620 on a fixed rate and 640 on an adjustable rateadjustable-rate mortgage (ARM)An adjustable-rate mortgage (ARM) is a loan whose interest rate can change, usually in step with a market index. It often starts with a fixed rate for an initial period (for example, the first few years) and then adjusts at set intervals, so your payment can go up or down. The contract sets caps on how much the rate can rise at each adjustment and in total. Before accepting one, check on the Loan Estimate how high your payment could reach and whether you could afford it.See the full definitionClose. If it goes through DU, its automated system, there is no minimum score: DU weighs your risk using several factors. For that minimum, with one borrower the representative score counts; with several, the average of their median scores.⁶

Your score does more than decide whether you qualify: Fannie Mae also charges loan-level price adjustments (LLPAs) based on the score, among other things.⁶

No score. Fannie Mae accepts loans where no borrower has a credit score.⁶ And on a manually underwritten HomeReady loan, a low score caused by a thin history can be accepted if the lender adds a nontraditional creditnontraditional creditNontraditional credit, sometimes called alternative credit, is a way to show you pay on time when you have no credit score or a very short traditional credit history. Under Fannie Mae's rules, the lender first checks all three credit bureaus; if there is no score, it documents your regular payments over the most recent twelve months, such as rent, utilities (electricity, gas, water, phone, internet), insurance, child care, school tuition or steady money transfers. How many references are needed depends on the loan product and how it is underwritten. In general it cannot replace a score you already have, even a low one.See the full definitionClose history.⁴ The nontraditional credit for a mortgage guide explains which payments count.

Your debts. The debt-to-income ratio (DTI)debt-to-income ratio (DTI)Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income, that is, income before taxes. If you pay a certain amount each month across a car, cards, student loans and the mortgage you are asking for, and you earn three times that, your DTI is one third. Lenders use it to measure whether you can manage the payment; each loan type and lender sets its own limit, and assistance programs usually publish theirs. Paying down debt before applying improves your DTI.See the full definitionClose compares your monthly payments, including the new house payment, with your income. On manually underwritten loans, Fannie Mae’s maximum is 36%, which can go up to 45% if you meet score and reserve requirements. With DU, the maximum is 50%.⁷ The debt-to-income ratio guide helps you work it out.

Private mortgage insurance (PMI) and when it ends

On loans Fannie Mae buys, if the loan is more than 80% of the home’s value, the lender must put mortgage insurance in place. On a purchase, the value is the lower of the price and the appraisalhome appraisalAn appraisal is a written document that gives a professional appraiser's opinion of how much a property is worth. The lender orders it before approving the mortgage, because the home is the loan's collateral and the lender does not want to lend more than it is worth. If the appraisal comes in below the price you agreed, the bank bases the loan on the lower value and you will have to cover the difference, renegotiate the price or walk away if your contract allows it. An appraisal is not an inspection: it measures value, not the home's condition.See the full definitionClose.⁸ That insurance is called PMIprivate mortgage insurance (PMI)Private mortgage insurance (PMI) is a type of mortgage insurance you might be required to buy on a conventional loan when your down payment is less than 20% of the purchase price. It protects the lender, not you, if you stop making payments. It is normally paid monthly as part of your payment, and the cost depends on your credit score and how much you put down. Unlike FHA insurance, PMI can be canceled once your balance falls far enough relative to the home's value; the lender must explain the rules to you.See the full definitionClose (private mortgage insurance). It protects the lender, not you: if you stop paying, you can still lose the home.⁹

How is it paid? Most often as a monthly premium, shown on page 1 of the Loan Estimate. Sometimes it is a single payment at closing; if you later move or refinance, you might not get that premium back.⁹ Fannie Mae accepts monthly, annual, single or split premiums.⁸ Some lenders offer low-down-payment loans without PMI in exchange for a higher rate; depending on how long you stay, that can cost more or less.⁹

The big difference from FHA insurance is that PMI ends by law, under the Homeowners Protection Act:

The life of PMI, from closing to the end

1. 1. At signing, you get the schedule and the notice

   Closing day

   On a fixed rate, the lender gives you the payment schedule and a notice with the date you can ask to cancel and the date it ends on its own.¹³

2. 2. Every year, a reminder

   Once a year

   Your servicer sends you your rights in writing and a phone number to ask whether you can cancel yet.¹³

3. 3. At 80% of the original value, you can ask to remove it

   On the scheduled date, or earlier with extra payments

   Ask in writing. You need a good payment history, to be current, no second mortgage and proof the home has not lost value.¹²

4. 4. At 78%, it ends on its own

   On the original schedule's date

   If you are current. If not, it ends on the first day of the month after you catch up.¹²

5. 5. At the midpoint of the loan, it always ends

   After 15 years on a 30-year loan

   Even if the balance has not reached 78%, as long as you are current.¹⁴

6. 6. You get back what was not used

   Within 45 days

   No premiums can be charged more than 30 days later, and the servicer returns unearned premiums.¹²

“Original value” is the lower of the contract price and the appraisal at closing. A “good payment history” means, among other things, no payment 30 or more days late in the last 12 months.¹¹ The CFPB says the first date you can ask is on the PMI notice you got with your mortgage, and that Fannie Mae and Freddie Mac may have their own rules, but none less favorable than the law.¹⁴ Note that these rules do not apply the same way to certain high-risk loans.¹²

Where the money can come from

Gifts from family. On a home you will live in, a gift can cover all or part of the down payment, closing costs or reserves. A relative can give it, or someone with a familial relationship, such as your partner, your fiancé or someone who has been like family for many years. On a one-unit home you do not have to put in any money of your own: all of it can be a gift. The donor signs a gift lettergift letterA gift letter is a document signed by the person who gives you money to buy a home, stating that the money is a gift and not a loan. For some loans, a gift can pay the down payment, closing costs or reserves, as long as you can prove where the money came from. Under Fannie Mae's rules, the letter states the amount of the gift, says no repayment is expected, and gives the donor's name, address, phone number and relationship to you. The lender also verifies that the money moved from the donor's account to yours or to the closing agent.See the full definitionClose stating the amount and that no repayment is expected.¹⁵ The gift money from family guide covers the paperwork.

Help from the seller. The seller, builder or agent can pay part of your closing costs, but never your down payment. On a home you will live in, the cap is based on the lower of the price or the appraisal: 3% if you finance more than 90%; 6% if you finance 75.01% to 90%; and 9% if you finance 75% or less.¹⁶

Cash saved at home. With HomeReady, cash you keep at home can go toward the down payment and closing costs on a one-unit home, if you customarily pay in cash and the money is deposited in your account at application, or at least 30 days before closing.⁴ The cash savings and your mortgage guide explains how to document it.

Down payment assistance. Many states and local organizations run programs that can be used with a conventional loan.¹⁹ The which programs do I qualify for tool looks for programs that might fit you.

Who can apply: ID number and residency

Fannie Mae requires each borrower to have a valid Social Security number or an ITINITIN (Individual Taxpayer Identification Number)An ITIN is a nine-digit number the IRS, the federal tax agency, issues to people who need a U.S. taxpayer identification number to file taxes and are not eligible for a Social Security number. It is for tax purposes only: it does not authorize you to work in the United States, does not qualify you for Social Security benefits or the Earned Income Tax Credit, and says nothing about your immigration status. You apply with Form W-7, and it expires if it goes unused for several years. Some lenders accept an ITIN for a mortgage.See the full definitionClose, in addition to meeting legal residency and documentation requirements. Each borrower signs the note and goes on the title.¹⁸

On residency, Fannie Mae buys loans made to non-citizens who are lawful permanent or non-permanent residents, on the same terms as citizens. It does not set the exact documents: the lender decides case by case, using the documentation it deems appropriate, and warrants to Fannie Mae that you are legally present in the country.¹⁷ That is why one lender may say yes and another no. The ITIN mortgages guide explains how to ask, and the guide to refinancing from an ITIN loan to a conventional loan helps if you already own and your situation has changed.

If this is you

You are buying for the first time

With HomeReady, if everyone is a first-time buyer, take the homebuyer course before closing.³ The homebuyer education courses guide explains the options.

Your income is low or moderate

HomeReady and Home Possible have an income limit of 80% of the area median income.³⁵ Check your area's before you apply.

You keep your savings in cash

With HomeReady, cash can count if you deposit it in time and explain where it came from.⁴

You live with relatives who chip in

With HomeReady, what people who live with you pay you can count as income, up to 30%, if they have lived with you for 12 months.⁴

Common mistakes

• Mistake: Believing you need 20% down for a conventional loan.

  Instead: HomeReady and Home Possible start at 3% if you meet the income limit.³

• Mistake: Forgetting about PMI and paying it longer than needed.

  Instead: Once your balance reaches 80% of the original value, ask in writing to cancel it.¹²

• Mistake: Paying PMI as a single premium and refinancing soon after.

  Instead: If you move or refinance, you might not get that premium back.⁹

• Mistake: Asking the seller to cover your down payment.

  Instead: The seller can only help with closing costs, with a cap based on how much you finance.¹⁶

• Mistake: Giving up because one lender said no because of your ITIN.

  Instead: Fannie Mae accepts an ITIN with documented legal residency;¹⁸ each lender decides the documents, so ask others.¹⁷

• Mistake: Choosing on the rate alone.

  Instead: Compare PMI, closing costs and the rate on the Loan Estimates.²⁰

What to do this week

1. Look up your county’s conforming limit on conforming loan limits.²
2. Compare your income with 80% of the area median income where you are shopping.³
3. Review your credit reports and your debt-to-income ratio.⁷
4. Work out your payment, with PMI, in the mortgage calculator.⁸
5. Ask several lenders for Loan Estimates and ask about HomeReady and Home Possible; they must arrive within three business days.²⁰
6. If you want to go over your options with someone, a HUD-approved housing counselorHUD-approved housing counselorA HUD-approved housing counselor works at an agency HUD has approved to provide housing counseling: independent, expert advice customized to your situation about buying a home, renting, a missed mortgage payment, a foreclosure or credit problems. The agencies usually charge little or nothing; many serve in Spanish and offer the homebuyer education course several assistance programs require. They are not lenders or real estate agents and sell you nothing. Your county page lists the official agencies with phone numbers.See the full definitionClose gives independent advice, often free or at low cost.²¹