The Basics
Down Payment Is a Pricing Lever, Not Just a Barrier
Most buyers think of the down payment as a fixed hurdle — you either have it or you don't. In reality, your down payment percentage is one of two variables (alongside credit score) that control your Loan-Level Price Adjustments. Every 5% increment you add to your down payment shifts you into a more favorable LLPA column, reducing both your interest rate and your PMI cost.
Conventional loans offer the widest range of down payment options of any loan type. From 3% programs designed for first-time and lower-income buyers all the way to 25% for investment properties, the right amount depends on your cash reserves, risk tolerance, and how long you plan to hold the property. Understanding each tier's trade-offs gives you the clarity to make a strategic decision rather than just meeting a minimum.
3%
Minimum (HomeReady / Home Possible)
5%
Standard conventional minimum
25%
Investment property minimum
Tiers
Down Payment Tiers: 3% Through 20%+
Each down payment tier unlocks different pricing and program features. Here's what changes at each level for a primary residence conventional purchase.
Down PaymentProgram / EligibilityPMI StatusLLPA Impact
3%
HomeReady, Home Possible, or Fannie 97. Income limits may apply.
See programs →PMI required (highest tier)
Highest LLPAs (95% LTV column)
5%
Standard conventional. No income limits. All borrowers eligible.
PMI required
High LLPAs (95% LTV column)
10%
Standard conventional. Reduces PMI significantly.
PMI required (reduced rates)
Moderate LLPAs (90% LTV column)
15%
Standard conventional. Strong equity position.
PMI required (low rates)
Lower LLPAs (85% LTV column)
20%
No-PMI threshold. Best standard pricing tier.
No PMI required
Favorable LLPAs (80% LTV)
25%+
Investment property minimum. Best possible LLPAs.
No PMI
Lowest LLPAs (≤75% LTV)
Rate Impact
How Down Payment Affects Your Rate Through LLPAs
Fannie Mae and Freddie Mac price every conventional loan using a matrix of credit score and LTV (loan-to-value). Your down payment directly determines the LTV, which means it directly controls one axis of your pricing. Moving from 5% down (95% LTV) to 20% down (80% LTV) can reduce your LLPA by 0.75% to 1.50% depending on your credit score — that's $2,250 to $4,500 on a $300,000 loan.
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The compounding effect of down payment + credit score
At 760+ credit with 20% down, your LLPA is just 0.125%. That same 760+ score at 5% down jumps to 0.250%. But at 660 credit, the gap widens dramatically: 20% down produces a 1.375% LLPA, while 5% down pushes it to 1.500%. The lower your credit score, the more each additional percentage of down payment saves you. See the full LLPA grid →
Beyond LLPAs, a larger down payment also reduces your PMI premium. PMI companies use the same credit/LTV matrix, so putting 10% down instead of 5% can cut your monthly PMI in half. At 20%, PMI disappears entirely. When you combine the rate improvement from lower LLPAs with the PMI savings, the total monthly cost difference between 5% and 20% down can be $200–$400 per month on a typical conventional loan.
Gift Funds
Gift Fund Rules for Conventional Down Payments
Conventional loans accept gift funds for part or all of the down payment, but the rules are more specific than FHA. The acceptable sources, documentation requirements, and whether 100% of the down payment can come from a gift all depend on how much you're putting down and who the gift is from.
Acceptable Gift Sources
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Family membersSpouse, parent, grandparent, sibling, aunt, uncle, or domestic partner. Most common source for gift funds.
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Fiance or fianceeAcceptable as a gift donor even though you're not yet legally married at the time of the transaction.
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Employer assistance programsEmployer grants, forgivable loans, or matched savings programs qualify as acceptable sources.
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Friends or unrelated individualsNot acceptable as gift donors for conventional loans. This is stricter than FHA, which has broader gift eligibility.
Key Gift Fund Requirements
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Gift letter requiredSigned letter from the donor stating the amount, relationship, property address, and that no repayment is expected.
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Paper trail documentationBank statement showing the withdrawal from donor's account and deposit into borrower's account (or sent to escrow).
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5% own-funds rule (sometimes)If putting less than 20% down on a 1-unit primary, at least 5% of the purchase price must come from your own funds unless using HomeReady or Home Possible. Those programs allow 100% gift at 3% down.
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Conventional vs. FHA gift rules
FHA allows 100% of the down payment to come from a gift regardless of down payment amount, and accepts gifts from a broader range of donors. Conventional has the 5% own-funds requirement in some scenarios. If gift funds are your primary down payment source, compare both options. See conventional vs FHA →
Investment
Investment Property Down Payment: 15%–25%
Conventional loans allow investment property financing — something FHA, USDA, and VA cannot do. However, the down payment requirements are substantially higher than primary residence purchases. The minimum depends on the number of units and whether you're purchasing or refinancing.
Property TypeMinimum Down (Purchase)Additional Requirements
1-Unit Investment
15% (fixed rate) / 25% (ARM)
6 months reserves, 620+ credit
2-Unit Investment
25%
6 months reserves, 620+ credit
3–4 Unit Investment
25%
6 months reserves, 620+ credit
Second Home
10%
2 months reserves, 620+ credit
Investment property loans also carry higher LLPAs — Fannie Mae adds a flat 1.125%–3.375% adjustment depending on LTV and credit score, on top of the standard LLPA grid. This means your effective rate on an investment purchase can be 0.50%–1.00% higher than the same loan on a primary residence. Despite this, conventional remains the most accessible and cost-effective financing option for non-owner-occupied properties.
See How Your Down Payment Affects Your Rate
Bayou Mortgage runs scenarios at multiple down payment levels so you can see the actual cost difference — not just estimates.
Common Questions
Down Payment FAQ
Answers about conventional down payment options, gift funds, and pricing impact.
What is the minimum down payment for a conventional loan? +
The absolute minimum is 3% through HomeReady (Fannie Mae), Home Possible (Freddie Mac), or the Fannie Mae 97% LTV program. These programs may have income limits or first-time buyer requirements. Without those programs, the standard conventional minimum is 5% for a primary residence.
See 3% down program details →Is it better to put 20% down or keep cash in reserves? +
It depends on your financial situation and investment alternatives. Putting 20% down eliminates PMI and improves your rate, but depleting your savings creates risk. If you have a strong emergency fund and the 20% doesn't stretch you thin, it's usually the best financial move. If it would leave you with minimal reserves, putting 10–15% down and keeping cash may be smarter — even with PMI factored in.
Can my entire down payment come from a gift? +
On HomeReady and Home Possible programs, yes — 100% of the down payment can be gifted at the 3% level. On standard conventional with less than 20% down, you typically need at least 5% from your own funds. With 20%+ down, there is no own-funds requirement — the entire amount can be gifted. Gift sources are limited to family members, fiancees, and employer programs.
How much does going from 5% to 10% down actually save? +
On a $300,000 home, that's an extra $15,000 in down payment. In return, you'd save roughly 0.25%–0.50% in LLPAs ($750–$1,500 upfront or approximately 0.0625%–0.125% off your rate) plus a 40%–50% reduction in monthly PMI. If PMI drops from $200/mo to $100/mo, you recover the extra $15,000 in about 12.5 years from PMI savings alone — faster when you include the rate improvement.
What counts as "own funds" for a down payment? +
Own funds include money in your checking or savings accounts (seasoned at least 60 days), proceeds from selling assets, retirement account withdrawals, and earnings from employment. Large deposits within the past 60 days may need to be sourced and documented. The lender reviews two months of bank statements to verify the origin of your down payment funds.
Do I need a down payment to refinance? +
Not in the traditional sense. Refinances use your existing home equity instead of a cash down payment. For a rate-and-term refinance, most conventional programs allow up to 97% LTV (meaning you need at least 3% equity). For a cash-out refinance, the maximum is typically 80% LTV. Your current home value determines how much equity you have available.
Can I use retirement funds (401k/IRA) for a down payment? +
Yes — withdrawals or loans from retirement accounts are acceptable down payment sources. A 401k loan doesn't count as debt on your DTI (since you're borrowing from yourself), but it does reduce your qualifying assets. An IRA withdrawal may qualify for a first-time buyer exception to avoid the 10% early withdrawal penalty on up to $10,000. Consult a tax professional before withdrawing retirement funds.
Figure Out Your Ideal Down Payment
Bayou Mortgage runs scenarios at 3%, 5%, 10%, and 20% so you can make a data-driven decision — not a guess.
