Home buyers tend to have a lot of questions regarding the down payment needed to buy a house with a mortgage loan. One of the most common questions has to do with the minimum or lowest down payment required for a conventional home loan. We’ve answered this question below.
Short version: The lowest down payment for a conventional home loan in 2022 will likely be 3% for most borrowers. That’s because Fannie Mae and Freddie Mac will purchase mortgages with a loan-to-value (LTV) ratio up to 97%. But there can be exceptions to these rules; some borrowers might be able to qualify with less money down. Some down payment assistance (DPA) programs offer grants or other funding for eligible home buyers.
Freddie Mac and Fannie Mae Guidelines
A conventional home loan is one that is not insured or guaranteed by the government. This distinguishes them from the FHA and VA mortgage programs, which do receive government backing.
A conventional home loan is originated within the private sector. And even when they do require insurance (due to a borrower making a low down payment, for instance), that insurance comes from a private company — not from the government.
Most conventional loans adhere to the guidelines and requirements used by Freddie Mac and Fannie Mae. These are the two government-sponsored corporations that purchase loans from lenders.
Many lenders prefer to sell their loans to Fannie or Freddie, because it reduces long-term risk and increases liquidity, allowing them to make more loans. But Fannie and Freddie have certain criteria for the loans they are able to purchase, and the down payment is one of those criteria.
Lowest Down Payment for a Conventional Loan in 2022
Both corporations support mortgage products with loan-to-value ratios up to 97%. This means they are willing to buy mortgages with minimum down payments as low as 3%.
So that’s where the bar is generally set, in terms of the minimum or lowest down payment for a conventional loan. As a result of the Freddie and Fannie guidelines, some (but not all) mortgage lenders will offer conventional loan products with down payments as low as 3% of the purchase price or appraised value.
Here’s what Fannie Mae says about their 97% LTV option:
“This is part of our ongoing efforts to expand access to credit for credit worthy borrowers to support sustainable homeownership.”
Here’s what Freddie Mac says about their 97% LTV option:
“Home Possible® mortgages offer low down payments for low- to moderate-income homebuyers or buyers in high-cost or underserved communities.”
This is primarily what defines the minimum down payment for a conventional mortgage loan in 2022. But again, there are exceptions to these general rules. Some mortgage lenders choose to keep their loans “on the books,” instead of selling them to Fannie or Freddie, and this allows for greater flexibility with the down payment and other criteria.
Of course, this does not mean you will automatically qualify for a 3% down payment. Depending on the specifics of the loan, the lender might require a larger upfront investment. This is often true for jumbo mortgage loans that exceed the conforming limits used by Fannie and Freddie.
Even Lower Than FHA?
It’s also worth mentioning that the lowest down payment for a conventional loan can be even lower than the minimum required investment for an FHA loan.
Many home buyers think that the FHA program offers the lowest down payment available today. Historically, this might have been the case. But things have changed.
The Department of Housing and Urban Development (HUD) requires all FHA borrowers to put down at least 3.5% of the purchase price or the appraised value. But with a conventional loan, borrowers could qualify for a down payment as low as 3%.
Using a Down Payment Assistance (DPA) Program
Home buyers with limited funds saved up should also look into down payment assistance (DPA) programs. Many state and local governments offer DPAs to first-time buyers or other pre-defined groups.
These programs vary widely, but the overall theme is the same. They offer eligible home buyers some kind of funding that can be put toward the buyer’s down payment expense. The funds might come in the form of a grant or a deferred second lien loan — or some other variety.
The point is, if you can’t afford the lowest down payment for a conventional mortgage loan, you might still have options. Look for DPAs offered by your state or local government. Find out what they offer and whether or not you’re eligible.
Using Gift Money from a Third Party
Borrowers who can’t afford the minimum down payment for a conventional home loan might be able to get by using gift funds. Many of the mortgage products available today allow borrowers to obtain funds from a third-party to cover some (or all) of the down payment expense. This is true for both FHA and conventional home loans.
Depending on the type of mortgage you use, you might be able to obtain gift money from family members, close friends, employers, or other approved sources. So be sure to ask your lender about this option, if it’s important to you.
The basic rules for using down payment gifts are:
- The gift must be fully documented with a letter from the person donating the funds.
- A clear paper trail should show how the money was donated from one person to another, including applicable bank statements.
- The money must not be a loan “in disguise.” It must truly be a gift, with no repayment expected.
Disclaimers: This is a basic overview of the minimum down payment required for a conventional home loan in 2022. There are a lot of variables involved in the mortgage lending process. Additionally, there are exceptions to many of the general rules stated above. As a result, your situation could differ from the examples presented in this article. Portions of this article might not apply to your specific situation. The best way to find out how much you have to put down is to speak to a lender, or multiple lenders.