Conventional loans have varying down payment requirements depending on whether you qualify as a first-time home buyer, are buying a single unit or a multi-unit property and whether the home is intended as use for your primary residence.
Our brief breakdown below will highlight the different conventional loan down payment requirements, acceptable ways to comes up with the down payment and down payment gift criteria.
Conventional Loan Series:
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Conventional loans offer two different 3% down payment options: one exclusively for first-time buyers and a second option for any borrowers that meet certain income restrictions (called the HomeReady loan).
To be eligible for either, the home must be your primary residence and a one-unit property.
If you’re not a first-time buyer and exceed the income restrictions for the HomeReady 3% down payment option, then the standard Conventional loan down payment of 5% will be required.
Note: there are often reduced rates on PMI if you put more than 5% down; specifically, at 10% down and 15% down there are significant discounts.
To be eligible for the 5% down payment option the home must be your primary residence and a one-unit property.
The conventional loan down payment goes up significantly if you’re buying a home that has multiple units. If the property you’re looking to purchase has more than 4 units then it would be considered a commercial property in which case you’d have to obtain a business loan or commercial loan, making it ineligible for Conventional loan financing.
Assuming one of the units will be used as your primary residence, the following table outlines the Conventional mortgage down payment criteria.
Important Tip: If you’re interested in purchasing a multi-family home to live in, while renting out the other units, the FHA loan is best when buying a multi-family property as it requires the same 3.5% down payment as long as it’s a 1-4 unit property (and assuming the amount borrowed is within FHA loan limits).
|Units||Down Payment Percentage|
|1 Unit (Single Family)||3-5%|
Conventional loans are one of the most popular options in the nation simply because it’s the only loan program allowed to be used when purchasing a second home or an investment (rental) property.
The down payments do increase drastically though due to the higher risk lenders take on these types of homes.
The following table outlines the conventional loan down payment on 2nd home and investment properties:
|Units||Second Home||Investment & Rental|
|2-4 Units||N/A (see investment property)||25%|
The most common source of conventional loan down payment funds is from borrower’s personal checking or savings accounts, money market accounts, investment assets (stocks, bonds, or CD’s) or retirement accounts such as a 401(k) or IRA.
For borrowers seeking a self employed mortgage loan, down payments can come from business accounts, however there are certain rules that must be met.
Gift funds is allowable to cover the down payment on Conventional loans for primary residence and second home purchases only. Gifts are not allowed on investment properties.
Gifts can be provided by:
The donor however cannot have any affiliation with the builder, developer, real estate agent or any other interested party.
All funds needed to cover the down payment can come from a gift if you’re putting more than 20% down OR if you’re purchasing a 1-unit primary residence.
If you’re buying a 2-4 unit primary residence OR buying a second home AND the down payment is less than 20%, then 5% of the down payment must come from the borrower’s personal funds.
Secured loans where a borrower is obtaining a loan secured by an asset they own is typically an acceptable source for a down payment on Conventional loans. Common examples are:
Unsecured loans are NOT acceptable sources to cover a down payment on a conventional loan.
The conventional loan down payment can range from 3-5% minimum requirements on primary residences. But can increae significantly if buying a multi-unit home, investment property or second home.
The rules and regulations are clear when it comes to sourcing down payment and how the funds are obtained, so long as you stick to them you shouldn’t have any problems.
If you have any questions, the loan advisors at United Fidelity Funding are there to help. Call, email or fill out one of our online forms and one of our licensed loan officers will be happy to address your questions.