Risk is a primary factor in determining the minimum down payment for a conventional loan. A down payment offsets a lender's risk and allows you to finance a smaller mortgage so you owe less to the lender. You receive more financing options and a lower monthly payment when your down payment is higher. The minimum amount a lender requires depends on the home and the loan. As of the time of publication, Fannie Mae and Freddie Mac offer first-time homebuyer loans with only 3 percent down.
Property Factors Affect Down Payments
Lenders that make conventional loans may keep the loan and service it until its repaid, or they may sell it to Fannie Mae or Freddie Mac. Fannie and Freddie set conventional-loan guidelines, including down payment minimums. The type of home and its intended use affects your down payment amount. For example, a single-family home used as a primary residence will have a lower down payment requirement than a four-unit property used for investment purposes. Secondary or vacation homes also have higher down payment requirements than principal residences.
Rates Vary With Size, Use of Property
As of the time of publication, you can get a Fannie Mae fixed-rate conventional mortgage for a one-unit primary residence with 3 percent down, a manufactured home for 5 percent down, a two-unit property that you live in for 15 percent and a second home with 10 percent down. A three- or four-unit primary residence requires 25 percent; a one-unit investment property requires 15 percent and a two- to four-unit investment property requires 25 percent down. Freddie Mac fixed-rate loans follow some of the same down payment rules as Fannie loans, with some exceptions. For example, a two- to four-unit primary residence requires 20 percent down and a second home requires 15 percent.
Loan Type Plays a Role
Fixed-rate mortgages carry less risk than adjustable-rate mortgages, or ARMs. Because an ARM interest rate can increase dramatically after a specified amount of time, there's a higher chance of default and the down payment requirement for the same property may be higher. For example, down payments for Fannie Mae ARMs are 10 percent higher than their fixed-rate counterparts. Freddie Mac loans don't differentiate between fixed-rate and ARM loans when it comes to the down payment requirement.
Low Down Payments Require PMI
Making the minimum down payment on a conventional loan requires private mortgage insurance, or PMI, when the down payment is less than 20 percent. The conventional down payments of 3, 5, 10, 15 percent and anything in between, result in an annual premium you must pay to insure the lender in case of default. PMI premiums range in cost, depending on your down payment size and the loan type, but typically range between .3 percent to 1.15 percent of the original loan amount annually. Conventional lenders may allow you to pay for PMI in a lump sum or in monthly installments along with your mortgage.