Conventional Loan with 1% Down: How It Works & Who Qualifies

Buying a home can feel like an overwhelming goal, especially when you think about the upfront costs. But what if I told you there’s a way to get into homeownership with as little as 1% down? That’s right—conventional loans with 1% down are becoming more popular for buyers who want to break into the housing market without saving up for a large down payment. Let’s dive into how this works, who qualifies, and whether it might be the right choice for you.

What Is a Conventional Loan with 1% Down?

A conventional loan with 1% down is exactly what it sounds like—a mortgage that requires only 1% of the home’s purchase price as a down payment. This is a huge advantage over the typical 3% or 20% down payment that traditional loans may require.

This option has been made possible through government-backed initiatives, like Fannie Mae and Freddie Mac, which aim to make homeownership more accessible. With a 1% down loan, you could be putting less money down upfront and still be eligible for a conventional loan, which often offers better rates and terms than government loans.

How Does a 1% Down Conventional Loan Work?

Here’s where it gets interesting. While you, as the buyer, only contribute 1% of the down payment, the lender actually matches the remaining 2% through a program known as the "3% down conventional loan with lender-paid 2% contribution." The result is still just 1% from you, but you’ll benefit from the flexibility and terms of a conventional loan.

That being said, there are some criteria you’ll need to meet. Fannie Mae and Freddie Mac each have specific guidelines for these low down payment programs. You’ll typically find this type of loan through certain lenders who offer specialized programs designed to make homeownership affordable.

Lender Requirements & Programs

Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that back many conventional loans, are behind many of these low down payment opportunities. The details of the program may vary slightly depending on whether your lender is using Fannie Mae or Freddie Mac, but here are the common requirements:

• Credit score: You’ll typically need a credit score of 620 or higher to qualify.
  
• Debt-to-Income (DTI) Ratio: Lenders will look at your DTI ratio, which measures your monthly debt payments relative to your monthly income. It’s a good idea to keep this below 45% for the best chance of approval.
  
• Income Limits: Some programs may have income limits based on the area where you're buying.
  

Benefits of a 1% Down Conventional Loan

The 1% down conventional loan offers several advantages, especially for first-time homebuyers or those who don’t have a large amount of savings. Here are the key benefits:

• Lower Upfront Costs: With only 1% down, you’re putting much less of your own money at risk. This allows you to get into a home sooner rather than later.
  
• Faster Path to Homeownership: Since the down payment is so much lower, you can move into homeownership faster and begin building equity.
  
• Competitive Interest Rates: Conventional loans often come with better interest rates than government loans (like FHA or VA), meaning you could save money over the life of the loan.
  

Eligibility Requirements for a 1% Down Conventional Loan

So, how do you know if you qualify for a 1% down conventional loan? Here are the key eligibility factors:

• Minimum Credit Score: Most lenders require a credit score of at least 620.
  
• Debt-to-Income Ratio: Keep your DTI ratio below 45% to increase your chances of approval.
  
• Income Limits: Some areas have income restrictions that could affect your eligibility, especially in high-cost areas.
  
• Property Type: Single-family homes are usually eligible, though there may be restrictions on investment properties.
  

How to Apply for a 1% Down Conventional Loan

Getting started with a 1% down conventional loan is similar to applying for any mortgage. Here's a quick rundown:

1. Get Pre-Approved: The first step is to get pre-approved with a lender. They will assess your credit, income, and financial situation.
   
2. Shop Around: Not every lender offers this type of loan, so it’s important to shop around and find one that does.
   
3. Submit Your Documents: You’ll need to provide typical mortgage application documents, like pay stubs, tax returns, and proof of assets.
   
4. Close on Your Home: Once you’ve been approved, you can move forward with purchasing your home.
   

Pros & Cons of a 1% Down Conventional Loan

Like any loan, there are pros and cons to consider:

Pros:

• Lower upfront cost.
  
• Faster path to homeownership.
  
• Often better rates than FHA loans.
  

Cons:

• You’ll still have to deal with mortgage insurance (PMI) since your down payment is less than 20%.
  
• Higher monthly payments due to PMI and possibly a higher interest rate than someone who makes a larger down payment.
  

Conventional Loan vs. FHA, VA, & USDA Loans

While the 1% down conventional loan is great for many, it’s important to compare it with other loan types to ensure you're making the right choice for your situation.

• 1% Down Conventional vs. FHA (3.5% Down): FHA loans typically require a 3.5% down payment and are more lenient with credit scores. However, they also come with higher mortgage insurance costs.
  
• 1% Down Conventional vs. VA (0% Down): If you’re a veteran, a VA loan offers no down payment and no mortgage insurance, making it a great option for eligible buyers.
  
• 1% Down Conventional vs. USDA (0% Down): USDA loans offer 0% down, but they are only available in rural areas and come with income limits.
  

Conclusion: Is a 1% Down Conventional Loan Right for You?

A 1% down conventional loan could be a game-changer if you’re eager to become a homeowner but don’t have a lot of savings. With lower upfront costs and competitive rates, it’s a smart way to get into a home sooner. However, it’s important to make sure you meet the eligibility requirements and understand the potential for PMI.

If you’re thinking about a 1% down loan, it’s always a good idea to consult with a trusted lender to discuss your options. Midwest Mortgage is here to help guide you through the process and help you decide which loan is right for you.

FAQs

Is a 1% down conventional loan legit?

Yes! This is a legitimate option for eligible buyers, backed by Fannie Mae and Freddie Mac.

What’s the catch with a 1% down mortgage?

The catch is that you’ll still have to pay PMI, and you may face higher costs if you don’t meet the eligibility requirements.

Can I combine a 1% down loan with down payment assistance?

It’s possible! Some programs allow you to use down payment assistance alongside a 1% down loan, but you’ll need to check with your lender.

What credit score do I need for a 1% down conventional loan?

A minimum credit score of 620 is typically required.

Does Midwest Mortgage offer 1% down conventional loans?

Yes, we offer these types of loans. Contact us to learn more about your options.

How does PMI work with a 1% down loan?

With a 1% down loan, you'll likely have to pay for PMI, which protects the lender in case you default. However, once you’ve built enough equity in your home, you can typically remove PMI.

If you’re ready to make a move and explore your options, reach out to us at Midwest Mortgage for more guidance!