Conventional Loan Down Payment Requirements and Guidelines
The minimum down payment for a conventional loan depends on credit, capacity, and collateral. Some lender’s conventional loan guidelines can be tougher and have additional requirements on:
- Conventional loan down payment requirements.
- Down payment needed for an investment property.
- Minimum credit score for conventional loan.
- Conventional loan home condition requirements.
Conventional Loan Down Payment Requirements – Primary
Not offering a loan program and requiring a larger down payment due to stricter guidelines on credit and capacity is common for a lender.
Conventional loan down payment requirements for a primary residence property are:
- A minimum of 3% down for a primary residence for a single-family residence.
- 5% down for a 2 to 4 unit property.
- And conventional grants are available, but some lenders do not offer grants and they can vary.
Down Payment Needed for Investment Property
The down payment needed for investment property is larger than primary residences and second homes. The major factor is the number of units needed for the down payment on an investment property.
- Single family residences require a minimum of 15% down.
- 2 to 4 unit investment properties require a minimum of 25% down for traditional loans.
Non-qualified mortgages allow lower down payment options for multi-unit properties. The debt-service coverage (DSC) loan is an option for borrowers that does take personal debt-to-income ratios as a qualifying factor. The DSC loan can even close in an LLC or corporation. Conventional loan guidelines and loan programs can vary by lender.
Conventional Loan Guidelines
Eligibility is broken down in three categories, which is determined during the pre-approval and underwriting process. The three factors are credit, capacity and collateral.
Guidelines for conventional loans can be found in:
An Automated Underwriting System (AUS) streamlines the process, which is a computer generated risk based system that determines eligibility results.
This system will look at a number of factors that assess the risk and determine if the ability to repay has been met. Factors include:
- Credit score.
- Recent derogatory events.
- Mortgage lates.
- Overall credit profile.
- Past performance: age, type, limits, usage, and status.
Minimum Credit Score for Conventional Loan
Mortgage companies use credit reporting services that often do not match credit scores on Credit Karma or other credit reporting services. Even though Credit Karma is a tool that can help monitor credit, a mortgage company will need to pull credit to underwrite the loan.
Fannie Mae and Freddie Mac requires a version of the classic FICO scores for loans, which consist of:
- Equifax Beacon® 5.0;
- Experian®/Fair Isaac Risk Model V2SM; and
- TransUnion FICO® Risk Score, Classic 04.
In order to find out true mortgage scores, you can ask a mortgage company to pull your score during the pre-approval process. They will use the middle of the three scores – the minimum credit score for conventional loan is 620.
If you meet the minimum credit score for conventional loan, capacity is another factor that will be analyzed during the pre-approval and underwriting process. Factors include:
- Debt-to-income ratios.
- Type of income.
- How many borrowers are on the loan.
- Loan characteristics.
Collateral is another factor and the risk can be reduced when putting more than the minimum down payment for a conventional loan. Factors include:
- Down payment or equity.
- Property type.
- Property use.
Even if all of the factors meet eligibility requirements, the property condition must meet conventional loan home condition requirements.
Conventional Loan Home Condition Requirements
The property will receive an overall rating, which is selected by an appraiser. The property will receive an overall rating between C1 through C6. Common issues cannot affect the safety, soundness, or structural integrity of the property.
Some common conventional loan home condition requirements:
- Meeting conventional roof requirements.
- Proper permits.
- Free from mold, termites, dampness, and abnormal settlement.
- No curled or cupped roof shingles.
- Solid settlement, foundation, and no environmental hazards.
- No water seepage.
- And other factors.
When a property does not meet conventional loan home condition requirements, there are rehab loan options for owner-occupied and non-owner occupied properties.