Every so often I hear people comment about needing 20% down to buy a home or that you have to have 20% down to get a conventional loan. These are some of the rumors that started over the last few years. They are definitely rumors!
Conventional loans require 5% down – unless you are using a first time homebuyer program that allows you to put 3% down, MN Housing offers this program. You do need private mortgage insurance unless you have 20% down.
There are some changes in the last few months that have made conventional financing even more attractive to many buyers. Fannie Mae changed their guidelines this winter and now allow gift money – in fact, the entire down payment can be a gift. Not all lenders will allow this, so check with your loan officer. If you have some of your own money and gift money, you do need 5% of your own money and we have to be able to document that the 5% is your own. If you have 5% down and it's all gift, that's ok – so is 10% down – all gift. You need to make sure your lender is approved for this and also that your mortgage insurance program will allow it – there are several that will allow this.
I have a client that is putting 10% down and it's a gift from her parents, that is ok. I have another client that is buying from his parents – they are giving him a gift of equity and that is also ok. In the past, we usually had to document that 5% was coming from the borrower's own funds. This new gift policy makes conventional financing much easier!
Private mortgage insurance is required if you have less than 20% down. The big difference between FHA and conventional financing is that with conventional loans, the MI will go away and usually conventional MI is lower than FHA. If you pay your loan down to 78% of the original balance, the MI will go away after you have had your loan for at least two years (as long as all your payments are on time). If you have using a gain in equity to reach 80%, you need to keep mortgage insurance for at least 5 years and once you have the 20% equity, you will need an appraisal to show the equity. If you do nothing, the MI will drop off your loan once you pay it down to 78% of the original balance.
You can get conventional fnancing with a credit score of 660 usually. If you have a lot of late payments, it may be more difficult. Your debt to income ratio usually has to be under 45%, sometimes less than that.
Conventional appraisals are usually less restrictive than FHA. There are many bank owned homes that do not want to accept FHA financing from buyers, with the gift option, more buyers can go to conventional financing.
Talk to your loan officer about the option of conventional financing – it may be another option that you were not aware you could use!