Conventional Home Loans with 3% Down – Requirements, Rates & Approval

 

Buying a home with just 3% down has become one of the most popular paths to homeownership, especially for first-time buyers. In 2026, conventional loans with low down payment options remain widely available — offering competitive rates, flexible terms, and the opportunity to enter the housing market sooner than saving for a larger down payment.

This guide breaks down everything you need to know about conventional 3% down home loans — including eligibility, typical interest rates, how mortgage insurance works, approval requirements, and tips to improve your chances of qualifying.

What Is a Conventional 3% Down Mortgage?

A conventional 3% down mortgage is a conforming loan (typically backed by Fannie Mae or Freddie Mac) that allows qualifying buyers to put down as little as 3% of the home’s purchase price as a down payment.

Unlike FHA loans, which are government-insured, these are private loans underwritten to conforming standards. The 3% down option is offered to help first-time buyers and moderate-income borrowers purchase homes sooner.

How Conventional 3% Down Mortgages Work

Down Payment

• Minimum: 3% of purchase price
  Example: On a $350,000 home, the down payment could be just $10,500.

Loan Type

• Conforming conventional mortgage
• Available in 30-year fixed, 15-year fixed, and often adjustable-rate (ARM) options

Mortgage Insurance (PMI)

Because the down payment is under 20%, private mortgage insurance (PMI) is required. PMI protects the lender in case of default, and the cost is typically added to your monthly payment.

Unlike FHA mortgage insurance, PMI can be canceled once you reach 20% equity in the home.

Who Qualifies for a 3% Down Loan?

These loans are especially geared toward first-time homebuyers, but in many cases, second-time buyers may also qualify — depending on lender policies.

General Eligibility Requirements

✔ Credit Score: Typically 620+ — but higher scores (700+) unlock better rates and PMI costs
✔ Debt-to-Income (DTI): Often ≤ 45% (can vary by lender)
✔ Steady Income & Employment: Evidence of reliable income for at least 2 years
✔ Primary Residence Only: 3% down is generally for primary homes, not investment properties
✔ Gift Funds Allowed: Many lenders allow part or all of the 3% down to come from gift funds from family
✔ Reserves: Some lenders want you to have a few months of mortgage payments saved

First-Time Buyer Definition

For most conventional programs, a first-time buyer is someone who hasn’t owned a home in the last 3 years. If you fall outside that window, some lenders may still let you put 3% down — but requirements may be stricter (higher credit score, stronger income).

Typical Interest Rates in 2026

Interest rates change daily and depend on your credit, loan term, and market conditions — but here’s what buyers might expect in 2026:

Loan Type	Approx. Interest Rate Range
30-Year Fixed	5.25% – 6.75%*
15-Year Fixed	4.75% – 6.00%*
5/1 ARM	5.00% – 6.25%*

Rates vary widely based on credit score, loan size, lender, and points paid at closing.

Higher credit scores and lower DTI typically qualify for the lowest rates. Even a fraction of a percent can save thousands over the life of the loan.

Private Mortgage Insurance (PMI) Explained

Since a 3% down conventional loan is considered higher risk for lenders, PMI is required.
Here’s what to know:

How PMI Works

• Added to your monthly mortgage payment
• Costs vary based on credit score and down payment amount
• Can range 0.5% – 1.5% of the loan annually

Canceling PMI

Once you reach 20% equity, you can request PMI cancellation. Most lenders also automatically cancel at 22% equity — meaning your monthly payment will drop when PMI is removed.

Loan Limits in 2026

Conforming loan limits are set by the Federal Housing Finance Agency (FHFA) and vary by county.
In 2026:

• Baseline conforming limit: ~$766,550 in most U.S. areas
• High-cost areas (e.g., parts of CA, NY): Higher limits

If your home exceeds these limits, you may need a jumbo loan, which typically requires a higher down payment and stricter qualifications.

Typical Closing Costs

Closing costs for a conventional mortgage range from 2% – 5% of the purchase price. They include:

• Appraisal fee
• Title insurance
• Origination fees
• Recording fees
• Prepaid taxes/insurance

Some buyers negotiate for the seller to pay part of closing costs, or use lender credits to offset expenses — but credits may increase your interest rate.

Steps to Get Approved (2026 Checklist)

1. Check Your Credit & Improve It

Obtain your credit reports, correct errors, and pay down high balances if possible.
A higher credit score boosts your chance of low rates and PMI discounts.

2. Get Pre-Qualified / Pre-Approved

Pre-qualification gives a general idea of what you can afford.
Pre-approval — with documentation — strengthens your offer in competitive markets.

3. Gather Required Documents

Typical documents include:

• Pay stubs (last 2–3 months)
• W-2s or tax returns (last 1–2 years)
• Bank statements
• Proof of down payment / gifts
• ID and social security

4. Compare Lenders

Rates and terms vary widely. Compare banks, credit unions, mortgage brokers, and online lenders.

5. Order Appraisal & Underwriting

The lender orders an appraisal to confirm the home’s value. Underwriting verifies your income, assets, and credit.

6. Review Loan Estimate

Within 3 business days of your application, lenders must provide a Loan Estimate showing interest rates, fees, and monthly payments.

7. Close the Loan

Sign documents and pay closing costs. After recording, the loan funds and you receive the keys!

Pros and Cons of 3% Down Conventional Loans

Pros

✔ Lower upfront cost than 20% down
✔ PMI can be canceled later
✔ Flexible down payment sources (gifts allowed)
✔ Access to competitive interest rates
✔ Available through many lenders

Cons

⚠ Higher monthly payment due to PMI
⚠ Equity builds slower
⚠ Stricter credit & income requirements than FHA
⚠ Potential for higher interest rates than larger down payment loans

3% Down vs. FHA: Which Is Better?

Feature	3% Down Conventional	FHA Loan
Down Payment	3%	3.5%
PMI/MIP	PMI (removable)	MIP (usually until refinance or 11–30 years)
Credit Score	620+ (better rates at 700+)	580+ eligible for lowest down payment
Debt Limits	Standard	Standard/waived in some cases
Approval	Competitive market	Often more flexible

Conventional 3% loans can cost less over time because PMI can be removed once equity is built — while FHA mortgage insurance usually lasts the life of the loan unless you refinance.

Tips to Lower Your Costs

✔ Pay Points

Paying discount points at closing can buy down your interest rate.

✔ Improve Your DTI

Lower debt load = stronger approval profile.

✔ Save for a Slightly Larger Down Payment

Even 5% down can reduce PMI significantly.

✔ Shop Around

Different lenders quote different interest rates and fees — comparing multiple lenders can save thousands.

Final Thoughts

Conventional loans with 3% down payment give many buyers a realistic path to homeownership — without waiting years to save 20%. In 2026, these loans are widely available from banks, credit unions, and online mortgage lenders.