May 28, 2021
Many home buyers want to know the minimum down payment for a conventional loan. The traditional mortgage down payment was considered to be 20%. But is that really the case? And how long has it been that way? Let's look into the history of the conventional down payment and see where it is today.
The History of Conventional Loan Down Payments
Most people think the subject of mortgage down payments is dry and boring. They probably think traditional loan down payment requirements are set by banks and have nothing to do with our nation's history. But that's not true. If you follow the timeline of changing down payment requirements, you can see how they reflect what was happening to our nation as a whole.
Before the 1930s, homeowners typically put down at least 30%, and most loans were non-amortizing and short-term. At the end of the term, the homeowner paid off the loan or received a new loan at a different interest rate. The average price of a home in 1930 was under $5,000.
- Before the 1930s down payments were at least 30% with short-term loans.
- From 1929-1933 the great depression brought foreclosures, the housing industry crashed, and construction halted.
- In 1934, mortgages were hard to get and required at least 50% down. The term was only 3-5 years. Most Americans didn't own a home. Six out of ten houses were rented.
- In 1934, the Federal Housing Administration (FHA) was created.
- WWII took place from 1939-1941.
- After WWII, the FHA reduced the down payment to 20% with a 30-year term. That was in hopes of helping more families buy a home. But with that lower down payment came mortgage insurance to protect the lender against default.
- From 1950 on, conventional lenders followed the FHA's guideline of 20% down.
- During 2007-2009, the great recession had many 0% down loans for borrowers with low credit scores and no income verification. These risky loans were later foreclosed on. Thankfully, those high-risk loans haven't returned.
PMI on Conventional Loans
Some form of mortgage insurance protecting lenders goes back as far as the 1880s. Private mortgage insurance (PMI) remains with us today for borrowers putting down less than 20%. For a conventional loan, PMI can be removed once there's 20% equity in the home. For an FHA loan, the mortgage insurance premium (MIP) remains for the life of the loan if you put down less than 10%. However, if you put down 10% or more, the MIP will only remain for 11 years.
Do conventional loans require 20% down?
If you're wondering: Are all conventional loans 20% down?” The answer is no. But, to get the best interest rate for an owner-occupied home, the traditional mortgage down payment is 20%. With that amount down, there's no mortgage insurance. There are other conventional mortgage programs where a borrower can purchase a home with less than 20%. Let's see what they are.
What is the minimum down payment for a conventional loan?
The minimum down payment for a conventional loan is 3%, but this is a program for low-income borrowers. So, there are specific guidelines and income limits. There's also a program that only requires 5% down, and we'll talk about that too.
3% Conventional Loan
Fannie Mae offers a first-time homebuyer program called HomeReady. This program is specifically for lower-income borrowers and is available across the country. There are income limits based on the area's median income. HomeReady is for borrowers with an income 80% or lower than the area's median income. The minimum credit score is 620. But, with a better score, you could have a lower interest rate.
Here are three examples of income limits in different locations:
- In Alexandria, Virginia, the median income is $124,900. For a HomeReady loan, your income can't exceed $99,920.
- In Largo, Florida, the median income is $69,200. For a HomeReady loan, your income can't exceed $55,360.
- In Auburn, California, the median income is $86,700. For a HomeReady loan, your income can't exceed $69,360.
As you can see, the income limits vary quite a bit depending on the property's location.
Here's the lookup tool so you can see what the limit is for the area you're home shopping in.
Freddie Mac has a similar loan called Home Possible. There are income limits, just like with HomeReady. Borrowers' income can't exceed 80% of the median income where they're purchasing the home. The minimum credit score is higher at 660.
5% Conventional Loan
There's another conventional loan that only requires 5% down with no income limits. The minimum credit score is 620. There would be PMI on this loan.
Conventional Loan Down Payment Requirements
Loan requirements vary whether it's a low-income 3%, 5%, or a full 20% down program. All require a credit score of at least 620 except for Freddie Mac's Home Possible which requires a minimum credit score of 660. And overall, the larger your down payment is, the better your terms will be.