3% Down Conventional Loan 2026: Why It Beats FHA for Most First-Time Buyers
3% down conventional loans (HomeReady & Home Possible) are now the best alternative to FHA for most first-time buyers with 620+ credit scores. While FHA requires 3.5% down, conventional 3% down programs offer removable PMI (vs FHA's lifetime PMI), saving $38,066 over 30 years on a $400K loan. With income limits up to $150K+ in many areas and lower total costs, 3% down conventional beats FHA for buyers with good credit. This complete 2026 guide covers HomeReady vs Home Possible, requirements, PMI comparison, and exact scenarios when 3% down beats 3.5% FHA. Compare with FHA loans or down payment assistance for more options. Get pre-approved for 3% down today.
🎯 3% Down Conventional Quick Facts (2026)
- ✓Down Payment: 3% ($12,000 on $400K home)
- ✓Credit Score: 620 minimum (best rates at 680+)
- ✓PMI: Removable at 20% equity (vs FHA lifetime PMI)
- ✓Income Limits: $100K-$150K+ (varies by area)
- ✓Programs: HomeReady (Fannie Mae) & Home Possible (Freddie Mac)
- ✓Savings vs FHA: $38,066 over 30 years (PMI removal)
- ✓Best For: 620-740 credit, first-time buyers, moderate income
💰 Why 3% Down Beats FHA (Most Cases)
3% Down Conventional vs FHA: Complete Comparison
| Feature | 3% Down Conventional | FHA 3.5% Down |
|---|---|---|
| Down Payment | 3% ($12K on $400K) | 3.5% ($14K on $400K) |
| Credit Score | 620 minimum | 580 minimum |
| Interest Rate | 6.00-6.25% | 6.25-6.75% |
| Upfront Fee | $0 | 1.75% ($7,000 on $400K) |
| Monthly PMI | 0.50-0.85% ($167-283/month) | 0.55% ($183/month) |
| PMI Removal | At 20% equity (8-10 years) | LIFETIME (never removed) |
| Income Limits | $100K-$150K+ (varies) | None |
| 30-Year Total Cost | $838,854 | $876,920 |
| Savings | Save $38,066! | - |
💡 Cost Breakdown: $400K Loan
3% Down Conventional:
FHA 3.5% Down:
✅ 3% Down Conventional saves $38,066 over 30 years!
🎯 Get Pre-Approved for 3% Down!
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HomeReady vs Home Possible: Which Program?
2 Programs, Nearly Identical
| Feature | HomeReady (Fannie Mae) | Home Possible (Freddie Mac) |
|---|---|---|
| Down Payment | 3% | 3% |
| Credit Score | 620 minimum | 620 minimum |
| Income Limits | 80% AMI ($100K-$150K+) | 80% AMI ($100K-$150K+) |
| Homebuyer Education | Required | Required |
| PMI Cancellation | At 20% equity | At 20% equity |
| Key Difference | Allows boarder income | Slightly lower PMI rates |
💡 Which Should You Choose?
It doesn't matter! Both programs are nearly identical. Your lender will automatically choose the one that gives you the best rate/terms. HomeReady allows you to count boarder/roommate income toward qualification. Home Possible sometimes has slightly lower PMI rates (0.01-0.05% difference). Bottom line: Apply for both and let your lender pick the best option.
3% Down Conventional Requirements
1. Credit Score: 620 Minimum
Rate Tiers by Credit Score:
620-679 credit? You may pay 0.50-1.00% higher rate than 740+ borrowers. Strategy: If you have 640+ credit, 3% down conventional still beats FHA. If you have 620-639 credit, compare both—FHA may be cheaper due to lower rates for low credit scores.
2. Income Limits: 80% Area Median Income
Typical Income Limits (Family of 4):
💡 Income Calculation
Only borrower income counts (not all household income like USDA). If you make $120K and spouse makes $40K, but only you're on the loan, your income is $120K (may exceed limit). Solution: Both spouses apply together to split income, or use regular 3% down conventional (no income limits, slightly higher PMI).
3. Homebuyer Education: Required
8-hour online course required (similar to DPA programs)
- • Cost: $0-$75 (many free options)
- • Format: Online self-paced (complete in 1-2 days)
- • Topics: Budgeting, mortgage types, home maintenance
- • Certificate: Valid for 1 year, submit with loan application
- • Providers: Framework Homeownership, eHome America, NeighborWorks
4. Debt-to-Income: 45-50% Max
DTI = (All Monthly Debts) ÷ Gross Monthly Income
- • Under 43%: Excellent—qualify easily
- • 43-45%: Good—most lenders approve
- • 45-50%: High—may need compensating factors (high credit, reserves)
- • Over 50%: Very difficult—pay down debt first
5. Reserves: 2-6 Months Recommended
Cash reserves = months of mortgage payments in savings
- • Not required but strengthens application
- • 2 months: Minimum recommended ($5,000 on $2,500/month payment)
- • 6 months: Ideal for approval ($15,000 on $2,500/month payment)
- • Counts: Checking, savings, 401k, IRA, stocks (60-70% of value)
💰 Check Your 3% Down Eligibility!
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When to Choose 3% Down vs FHA
✅ Choose 3% Down Conventional If:
- ✓Credit score 640+: You'll get competitive rates and save vs FHA
- ✓Income under limits: $100K-$150K+ depending on area
- ✓Plan to stay 10+ years: PMI removal saves $38K+ over loan life
- ✓Want lower total cost: No upfront fee + removable PMI = cheaper
- ✓Can complete education: 8-hour course required (easy to do)
✅ Choose FHA If:
- ✓Credit score 580-639: FHA more lenient, may offer better rates
- ✓Income over limits: FHA has no income limits (any income level)
- ✓High DTI (45-50%): FHA more flexible with debt ratios
- ✓Recent credit issues: FHA allows bankruptcy/foreclosure sooner
- ✓Need seller concessions: FHA allows up to 6% (vs 3% conventional)
Frequently Asked Questions
Can I use 3% down conventional for a second home or investment property?
No—primary residence only. HomeReady and Home Possible require you to occupy the home as your primary residence. Second homes: Require 10% down minimum (conventional), Investment properties: Require 15-25% down. Exception: You can buy a 2-4 unit property with 3% down if you live in one unit (house hacking strategy). Learn about house hacking.
How long until I can remove PMI on a 3% down conventional loan?
Typically 8-10 years to reach 20% equity. Calculation: $400K home with 3% down = $388K loan. Need $80K equity (20% of $400K) to remove PMI. Equity buildup: Years 1-5 = $35K equity (principal paydown), Years 6-10 = $45K equity (faster paydown). Total: 10 years to 20% equity through payments alone. Faster options: (1) Home appreciation (if home value rises to $485K, you have 20% equity in 5 years), (2) Extra payments (pay $200/month extra = 7 years to 20%), (3) Refinance when you hit 20% equity.
What if I exceed the income limits for HomeReady/Home Possible?
Use regular 3% down conventional (Conventional 97). Same 3% down payment, but: (1) No income limits (any income level), (2) No homebuyer education required, (3) Slightly higher PMI (0.10-0.20% more = $30-60/month extra), (4) Same credit requirements (620+ minimum). Bottom line: If you exceed income limits, Conventional 97 still beats FHA in most cases due to removable PMI.
Can I combine 3% down conventional with down payment assistance?
Yes! You can combine HomeReady/Home Possible with down payment assistance (DPA) programs to cover the 3% down payment + closing costs. Strategy: (1) Use DPA grant/forgivable loan for 3% down ($12K on $400K home), (2) Use savings for closing costs ($8K-12K), or (3) Use DPA for both down payment + closing costs ($20K-25K total). Result: Buy with minimal out-of-pocket cash while getting removable PMI benefits. Find DPA programs.
🚀 Ready to Get 3% Down Conventional?
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