You cannot put 3.5% down on a conventional loan. That figure is the FHA minimum, set by the National Housing Act, and it does not exist in conventional lending. Conventional mortgages start at 3% down for borrowers who qualify for a specific low-down-payment program, or 5% down under the standard guidelines Fannie Mae and Freddie Mac set for everyone else.1Fannie Mae. Get to Know the Types of Mortgage Loans So if you were planning on 3.5%, you have two real options: drop to 3% through one of the programs below, or come up with 5%.
Why 3.5% Isn’t a Conventional Option
A conventional mortgage is any home loan not backed by a federal agency such as the FHA, VA, or USDA.2Consumer Financial Protection Bureau. Conventional Loans Without a government guarantee, lenders follow the floors set by Fannie Mae and Freddie Mac, the two investors that buy most conventional loans. Those floors are 3% and 5%, not 3.5%. The 3.5% figure belongs exclusively to FHA financing.3HUD. What Is the Minimum Down Payment Requirement for FHA?
For a single-family home you plan to live in, the standard conventional minimum is 5%. Two- to four-unit primary residences require 5% when run through automated underwriting and 15% when manually underwritten.4Fannie Mae. Eligibility Matrix Second homes typically require 10%, and investment properties 15% to 25%. The 3% figure is available only on a single-family primary residence and only through one of four specific programs.
The Four Conventional Programs That Allow 3% Down
If 3% works for your budget, you have four programs to choose from. They split into two groups by income.
HomeReady and Home Possible (Income-Restricted)
Fannie Mae’s HomeReady and Freddie Mac’s Home Possible are built for borrowers earning no more than 80% of the area median income for the property’s location. Both allow 3% down on single-family homes, condos, and some multi-unit properties. HomeReady requires a minimum credit score of 620.5Fannie Mae. HomeReady Low Down Payment Mortgage Home Possible sets the floor at 660 for purchase transactions underwritten manually.6Freddie Mac. Home Possible Mortgage Fact Sheet Both also carry reduced mortgage insurance premiums compared to standard conventional loans, which lowers the monthly cost of putting less down.
Conventional 97 and HomeOne (No Income Limits)
Earn too much for HomeReady or Home Possible? Fannie Mae’s Conventional 97 and Freddie Mac’s HomeOne have no income caps at all. The main condition is that at least one borrower on the loan must be a first-time homebuyer, meaning you haven’t owned a home in the past three years.7Fannie Mae. FAQs – 97 Percent LTV Options Both programs require a 620 credit score and limit you to single-family homes, condos, and planned unit developments. Two- to four-unit properties are not eligible.
Homebuyer Education
All four 3%-down programs require at least one borrower to complete a homebuyer education course when every borrower on the loan is a first-time buyer. The course must come from a HUD-approved counseling agency or a provider whose curriculum aligns with National Industry Standards. Fannie Mae’s free online HomeView course meets the requirement.8Fannie Mae. Homeownership Education Finish it before you apply so it doesn’t slow underwriting down.
What a 3% Down Payment Actually Costs
Any conventional loan with less than 20% down requires private mortgage insurance.2Consumer Financial Protection Bureau. Conventional Loans PMI protects the lender if you default and typically runs between 0.5% and 1.5% of the loan amount per year, with your credit score and down payment size driving the exact rate. On a $300,000 loan, that works out to roughly $125 to $375 per month on top of principal, interest, taxes, and insurance.
Coverage levels vary. A 97% loan-to-value fixed-rate conventional loan with a term over 20 years requires 30% PMI coverage. HomeReady loans get a break: 25% coverage at the same loan-to-value, which translates to a lower monthly premium.9Fannie Mae. Mortgage Insurance Coverage Requirements
The important part is that conventional PMI goes away. Federal law gives you two paths. You can request cancellation in writing once your loan balance reaches 80% of the home’s original value, assuming you’ve paid on time and have no second mortgage.10Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance If you don’t request it, your servicer must cancel PMI automatically once the scheduled balance reaches 78% of the original value.11Consumer Financial Protection Bureau. When Can I Remove Private Mortgage Insurance (PMI) From My Loan? You need to be current for either path to work.
If your home appreciates or you prepay principal, you can request earlier cancellation based on current value. Fannie Mae requires the loan to be at least two years old and the loan-to-value ratio to be 75% or less. After five years, that threshold eases to 80%.12Fannie Mae. Termination of Conventional Mortgage Insurance
Conventional 3% vs. FHA 3.5%
Since you came in expecting 3.5%, the FHA option is probably worth a direct look. The down payment gap between the two is only half a percentage point. The mortgage insurance gap is much bigger.
FHA loans charge an upfront mortgage insurance premium of 1.75% of the loan amount, usually rolled into the balance, plus an annual premium paid monthly. If you put down the minimum 3.5%, that monthly FHA insurance stays for the life of the loan. It never drops off. The only way out is to refinance into a different loan type. Conventional PMI, by contrast, cancels automatically or by request once you hit the equity thresholds above.
On a mortgage you plan to hold for a decade or more, that difference can total tens of thousands of dollars. FHA still makes sense in two situations: your credit score is below 620, which locks you out of every 3%-down conventional program, or that extra half-percent down payment genuinely decides whether you can buy at all. If your credit is 620 or higher and you can put together 3%, conventional financing is usually the cheaper long-term choice.
Using Gift Funds to Get to 3%
If 3% is still a stretch, you don’t necessarily need to save every dollar yourself. On a one-unit primary residence, your entire 3% down payment can come from gift funds. Fannie Mae imposes no minimum contribution from the borrower’s own savings in that scenario.13Fannie Mae. Personal Gifts A family member can fund the whole down payment and closing costs, and the loan still qualifies.
Acceptable donors include relatives by blood, marriage, or adoption, domestic partners, and people with a long-standing familial-type relationship with you.13Fannie Mae. Personal Gifts The donor cannot be the builder, developer, real estate agent, or anyone else with a financial interest in the sale. You’ll need a signed gift letter stating the money is a gift and not a loan, plus documentation of the transfer into your account.
A seller can also help, but through a different mechanism called a gift of equity. It can cover all or part of your down payment and closing costs as long as the donor meets the standard eligibility rules.14Fannie Mae. Gifts of Equity Separately, a seller may contribute to closing costs up to 3% of the sale price when your down payment is under 10%.15Fannie Mae. Interested Party Contributions (IPCs) That cap matters at 3% down because closing costs typically run 3% to 6% of the loan amount, so even with maximum seller help you may need cash beyond the down payment itself.
The Short Version
There is no 3.5% down conventional loan. If you want to stay conventional and keep the down payment near that figure, apply for a 3%-down program: HomeReady or Home Possible if you earn 80% or less of the area median income, Conventional 97 or HomeOne if you earn more and at least one borrower on the loan is a first-time buyer. You’ll need a 620 credit score (660 for manually underwritten Home Possible loans), homebuyer education if everyone is a first-timer, and PMI until you reach 20% equity. If none of that fits, the FHA 3.5% route is still available, and for borrowers with credit under 620 it’s often the only route.