Conventional loans are a great home financing option for people who are in the market for purchasing a home because they offer lower costs and a variety of different loan options. It is a common misconception that in order to obtain a conventional loan, you must pay a 20% down payment, but that is not the case. In fact, you can qualify for a conventional loan by putting down as low as a 5% down payment. Our loan specialists at Foundation Mortgage can help you determine if a conventional loan suits your situation, and can help you understand the different loan types that are available to you. We serve the areas of Knoxville, Maryville, Lenoir City, Oak Ridge, and Gatlinburg, Tennessee.
How Does a 5% Down Conventional Loan Work?
A conventional loan is classified as any loan that is not guaranteed through a government agency, but rather, is insured through private lenders or a government-sponsored enterprise, (GSE). Most conventional mortgages are conforming loans, which means that they meet the requirements to be sold by government-sponsored enterprises, such as Freddie Mac or Fannie Mae. These GSEs set conforming loan limits and set the guidelines for credit score and down payments. Because these loans are not insured through the federal government, they pose a certain risk to lenders since they aren’t guaranteed payment in the event of a borrower default. Therefore, the eligibility requirements for conventional loans tend to be stricter than non-conventional loans.
Even if a borrower has lower credit, they can still qualify for a 5% down conventional loan, which means you will need to finance 95% of the value of the home. Typically, if a down payment is less than 20%, private mortgage insurance, (PMI) will be required in order to protect lenders in case you are unable to pay your loan, so PMI is required with a 5% down conventional loan. You can choose to pay private mortgage insurance all at once along with closing costs, or incorporate the charges into your monthly mortgage payments. Some benefits of a 5% loan include: the opportunity to opt for either an adjustable rate or a fixed rate mortgage, the down payment can be a gift, there are usually less constrictive appraisal requirements than with government-backed loans, and private mortgage insurance ends once 78% of the loan has been paid off.
Requirements For a 5% Down Conventional Loan
In order to be eligible for a 5% down conventional loan, there are some specific requirements that must be met. These requirements typically include:
- You will need at least a credit score of 620 or higher
- You will need to pay for private mortgage insurance
- Your debt-to-income ratio, (DTI), which indicates how much of your income goes to towards debt payments, should be 50% or lower
- Your loan amount must fall within the loan limits set by Fannie Mae or Freddie Mac, which at this time is under $510, 400
Assistance With a 5% Down Conventional Loan
If you need help with understanding what type of loan is right for you, and if you qualify for a 5% down conventional loan in the areas of Knoxville, Maryville, Lenoir City, Oak Ridge, of Gatlinburg, Tennessee, contact Foundation Mortgage today. We can help guide you through the mortgage process.