The Lowest Down Payment You Can Make on a Conventional Loan

Conventional loans now allow down payments as low as 3 percent

A conventional loan is a mortgage that is not backed by the federal government—unlike FHA, VA, or USDA loans. Most conventional loans require a down payment of 20 percent, but lenders now routinely offer conventional mortgages with down payments as low as 3 percent of the home's purchase price. Some lenders go lower, to 2 percent or even 1 percent, though these are less common and come with higher costs.

The catch is that when you put down less than 20 percent, you must pay private mortgage insurance (PMI)—an extra monthly fee that protects the lender if you stop paying. The lower your down payment, the higher your PMI cost. On a $300,000 home with 3 percent down, PMI might add $150 to $300 per month to your payment. That cost stays until you build enough equity (usually 20 percent) or refinance.

Whether a 3 percent down payment makes sense depends on your situation: if you have stable income, good credit, and savings for closing costs and emergencies, it can let you buy sooner. If you are stretched thin, the monthly PMI bill plus the mortgage itself might strain your budget.

Key Takeaways

• Conventional loans with 3 percent down are widely available from most lenders, though some offer 2 percent or 1 percent down.
• You will pay private mortgage insurance (PMI) every month until you reach 20 percent equity, which typically adds $100 to $400 monthly depending on the loan size and your credit score.
• Your credit score, debt-to-income ratio, and savings for closing costs all affect whether a lender will approve you at 3 percent down.
• PMI can be removed once you reach 20 percent equity through a combination of down payment and home appreciation, or by refinancing.

How down payment size affects your monthly costs

The lower your down payment, the larger your loan amount and the higher your monthly mortgage payment. On a $300,000 home, putting down 3 percent ($9,000) means borrowing $291,000. Putting down 20 percent ($60,000) means borrowing $240,000—a difference of $51,000 in borrowed money.

That $51,000 difference translates to roughly $300 more per month in principal and interest alone, spread over 30 years. Add PMI on top of that, and a 3 percent down payment can cost $400 to $500 more per month than 20 percent down on the same home. Over five years, that is $24,000 to $30,000 in extra payments.

However, if you do not have $60,000 saved, the choice is not between 20 percent down and 3 percent down—it is between buying now with 3 percent down or waiting years to save more. In a market where home prices are rising, buying sooner can mean paying less overall, even with PMI.

Credit score and debt requirements for 3 percent down

Lenders have tightened their rules since 2008. To get approved for a conventional loan with only 3 percent down, most lenders require a credit score of at least 620, though many prefer 640 or higher. A higher score (680+) gets you better interest rates and lower PMI costs.

Lenders also look at your debt-to-income ratio (DTI)—the percentage of your monthly income that goes to debt payments. With 3 percent down, most lenders cap DTI at 43 to 50 percent, meaning if you earn $5,000 per month, your total monthly debt payments (car loans, credit cards, student loans, and the new mortgage) cannot exceed $2,150 to $2,500. The lower your down payment, the stricter this limit tends to be.

You will also need to show cash reserves—usually two to three months of mortgage payments sitting in a bank account after closing. This proves you can handle the mortgage if you lose income temporarily. With a 3 percent down payment, lenders want to see that you have a financial cushion.

Closing costs and cash needed at signing

Down payment is only part of what you need at closing. You also pay closing costs—fees for the appraisal, title search, loan origination, homeowners insurance, property taxes, and other services. Closing costs typically run 2 to 5 percent of the loan amount, or $5,000 to $15,000 on a $300,000 home.

Some lenders allow you to roll closing costs into the loan, which means you borrow the money instead of paying it upfront. This increases your monthly payment but reduces the cash you need at signing. Other lenders require you to pay closing costs out of pocket. A few programs allow the seller to pay part of your closing costs, though this is negotiated as part of the purchase offer.

Before you commit to 3 percent down, calculate your total cash need: down payment plus closing costs plus reserves. If that number exceeds your savings, ask the lender whether closing costs can be rolled into the loan or whether the seller might cover part of them.

When PMI ends and how to remove it

Private mortgage insurance is not permanent. Federal law requires lenders to remove PMI automatically once you reach 20 percent equity in the home, calculated as the original loan amount divided by the current home value. If you put 3 percent down on a $300,000 home and the home appreciates to $375,000, you hit 20 percent equity faster.

You can also request PMI removal once you reach 20 percent equity, though the lender may require a new appraisal to confirm the home's value. Some lenders remove it automatically on the anniversary of your loan; others require you to ask. Check your loan documents or call your lender to learn their specific rules.

Another path is to refinance once you have built equity or if interest rates drop. A refinance replaces your old loan with a new one, and if you refinance into a loan amount that is 80 percent or less of the home's current value, you can skip PMI on the new loan. Refinancing costs money (closing costs again), so it only makes sense if the interest rate savings or PMI removal outweigh those costs.

Comparing 3 percent down to other low-down-payment options

Conventional loans with 3 percent down are not your only option. FHA loans allow down payments as low as 3.5 percent and are easier to get approved for if your credit score is below 620. However, FHA loans require mortgage insurance for the life of the loan (or at least 11 years), which is often more expensive than conventional PMI.

VA loans (for military members and veterans) and USDA loans (for rural homebuyers) allow zero down payment, but you must meet specific may be able to access requirements. If you may have access to for either, they are usually cheaper than conventional 3 percent down because there is no PMI.

Some state and local programs offer down payment help—grants or forgivable loans that reduce the cash you need upfront. These vary widely by location and income level. Your real estate agent or a local housing counselor can tell you what programs exist in your area.

Frequently Asked Questions

Can I get a conventional loan with less than 3 percent down?

Some lenders offer 2 percent or 1 percent down conventional loans, but they are less common and usually require a higher credit score (680+) and lower debt-to-income ratio. The PMI cost is also higher because your equity cushion is smaller. Ask your lender whether they offer these products.

What happens if my home value drops after I buy?

If your home loses value, you build equity more slowly and PMI stays longer. You are also at risk of owing more than the home is worth if you need to sell. This is why lenders require reserves and a solid credit history for low down payments—they want to know you can weather a downturn.

Can I avoid PMI by putting 3 percent down?

No. Any conventional loan with less than 20 percent down requires PMI. Some lenders offer "lender-paid mortgage insurance" where the lender covers PMI but charges you a higher interest rate instead. This can be cheaper if you plan to sell or refinance within five to seven years, but it costs more over 30 years.

How long does it take to build 20 percent equity?

It depends on home appreciation and how fast you pay down the loan. With a standard 30-year mortgage and no home appreciation, you reach 20 percent equity after about 11 years of payments. If your home appreciates 3 percent per year, you might reach it in 7 to 8 years. Refinancing or making extra principal payments speeds it up.

Should I wait and save for a bigger down payment?

That depends on your local market and timeline. If home prices are rising faster than you can save, buying now with 3 percent down and paying PMI might cost less overall than waiting. If prices are stable or falling, waiting to save more makes sense. A mortgage lender or housing counselor can run the numbers for your situation.