In today's market, homebuyers can qualify for a conventional 97 loan -- a conventional loan with 3% down. Learn how to qualify.
Buying a home used to be a lot harder than it is now, at least when it came to saving up a down payment. But gone are the days when you needed to put down 20% to buy a home, even with a conventional mortgage.
Today, you can get into a house with just 3% down with a conventional 97 loan, which is a game-changer for many homebuyers.
On a $350,000 home, you’d need $10,500 to make a 3% down payment. Compare that to the whopping $70,000 you’d need for 20% down.
Conventional 97 shortens your homebuying timeline substantially.
If saving for a down payment has held you back in the past, homeownership could come sooner than you think.
To qualify for a conventional loan with a 3% down payment, homebuyers will need to meet a few criteria. For one, you will need to meet minimum credit score and debt-to-income (DTI)* requirements.
Typically, you’ll need a credit score of 620 or higher and a DTI determined by the Automated Underwriting response run by your lender to be eligible for a conventional 97 loan.
Some programs also require that the borrower — or, if more than one person is on the loan, at least one co-borrower — be a first-time homeowner. Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that back conventional loans, define this as someone who hasn’t owned a home in the last three years.
Conventional loans are available to the full spectrum of borrowers, from low income to high-earning homebuyers.
First-time homebuyers may have to complete a homeownership course before the lender can approve the loan, depending on the program guidelines.
But there are 3% down conventional loans that don’t have first-homeownership rules. So don’t rule out a low down payment if you’ve owned before.
Additionally, programs like Freddie Mac Home Possible conventional 97 loans have income limits, meaning that the borrowers must not earn above a certain threshold.
However, there are plenty of conventional options that do not cap the amount of income you can earn in order to qualify. Conventional loans are available to the full spectrum of borrowers, from low income to high-earning homebuyers.
Conventional loans are the most common type of mortgage, as they refer to any loans that are not government-backed. However, there are different categories of conventional loans, and the one most people use to buy a home is a conforming loan.
A conforming loan is a mortgage that falls within the conforming loan limits and other guidelines set by the Federal Housing Finance Agency (FHFA). The conforming loan limits for a single-family home in 2021 range from $548,250 to $822,375, with higher-cost areas seeing the upper limits of that range.
Conventional loans are different from government-backed mortgages in two key ways: they can be more difficult to qualify for and they have different mortgage insurance requirements.
While conventional loans generally require a credit score of at least 620, higher scores usually mean more affordable loans. Due to loan level price adjustments — rate increases lenders can use to offset their risk when a borrower has a low credit score or is buying a home with a low purchase price — a conventional loan can be quite costly if your credit score is just so-so.
When you take out a conventional 97 loan, you will owe private mortgage insurance (PMI) until you reach 20% equity in the home. PMI is calculated as a percentage of your loan amount and is included in your monthly mortgage payment. Once you have 20% equity, you can request that the PMI charge be removed. At 22%, the PMI requirement ends automatically. However, you still want to reach out to your current loan servicer to ensure it is removed.
Conventional loans are different from government-backed mortgages in two key ways: they can be more difficult to qualify for and they have different mortgage insurance requirements.
This is a big difference from FHA and USDA loans, both of which are government-backed. FHA loans are insured by the Federal Housing Administration (FHA) and require an upfront and annual mortgage insurance premium (MIP). The upfront fee is 1.75% of the loan amount, and on most FHA loans, the annual MIP is 0.85%, which is calculated each year based on the loan balance.
Most FHA borrowers put down 3.5%, which means they will owe MIP for the life of the loan. The only way they can stop paying MIP is by refinancing to a conventional loan.
USDA loans, which are backed by the U.S. Department of Agriculture (USDA), require an upfront mortgage insurance guarantee fee of 1% and annual mortgage insurance of 0.35% of the loan balance.
A 3% down payment is the minimum needed for a conventional 97 loan. But if your great score isn’t great and your DTI is on the higher end, you may need to put more money down to qualify for a conventional loan.
A conventional 97 loan has a high loan-to-value ratio (LTV)*. You’re borrowing 97% of the loan (hence the name) and putting down just 3% upfront. The more money you need to borrow, the higher the risk for your lender, since they are putting significantly more money into the home than you are upfront.
A high LTV combined with a low credit score and high DTI can make you seem too risky for some lenders. By putting more money down, you lower your LTV and reduce the risk to your lender — and that can improve your chances of being approved.
So what does it take to qualify for a 3% down conventional loan? The specific guidelines vary by program, but generally speaking you’ll need:
Lenders can also set their own standards in addition to the Fannie Mae and Freddie Mac guidelines, so some may have stricter requirements. It’s best to request quotes from multiple lenders so you can find out which loan options are available to you and the overall cost of borrowing from each company.
There are several different types of conventional 97 loans. We’ve highlighted a few below, but you’ll want to talk with a lender about which programs they offer and which suit your situation best.
To qualify for the Fannie Mae HomeReady program, your income must not exceed 80% of the area median income (AMI) where you intend to buy the home. The program is available to first-time and repeat homebuyers. But if all borrowers on the loan are first-time homebuyers, at least one must complete a homebuyer education course.
This loan program is geared toward first-time homebuyers. If all borrowers are first-time homebuyers and they put down less than 5%, at least one borrower must complete a homebuyer education course before the mortgage closes. There are no income limits for the conventional 97% standard option; so high-earning first-time homebuyers may qualify.
Like Fannie Mae’s HomeReady program, the Freddie Mac Home Possible option has an 80% AMI income limit. Home Possible borrowers can use gift money from family members or funds from an employee-assistance program toward their down payment, and the amount of fees lenders may charge on the loan are capped, which may make this a more affordable loan for low- and moderate-income borrowers.
The Freddie Mac HomeOne program requires that at least one borrower be a first-time homebuyer and only applies to single-family homes, including detached houses, condos, and homes in planned unit developments. The home must be your primary residence, and the loan amount must be within standard conforming loan limits.
Related: Top 12 Low and No Down Payment Mortgages for 2021
Yes, you can. In fact, the more money you put down, the better the terms you’re likely to get. Even if you can qualify with a 3% down payment, putting down more — even just 5% — may help you get a more competitive interest rate. You’ll also pay less in PMI since you’ll achieve 20% equity that much sooner.
And you don’t need to make a huge jump. Bumping your down payment up from 3% to just 5% can give you a leg up. For instance, if you were to purchase a $300,000 home, a 5% conventional loan will require a $15,000 down payment, whereas 3% would be $9,000. Yes, you’re putting down an additional $6,000 upfront, but having 5% may help you save on the cost of the loan overall.
Putting down more than 3% can also give you access to other conventional loan programs that don’t require first-time homebuyer education courses and don’t impose income limits on borrower eligibility.
If you don’t qualify for a conventional 97 loan, there are other low down payment options — specifically, government-backed mortgages — which can be easier to qualify for.
VA loans have a 0% down payment option for qualified borrowers, as do USDA loans. Borrowers with a credit score of 580 or higher can get an FHA loan with as little as 3.5% down.
| Loan type | What it is? | Minimum credit score*** | Down payment required |
|---|---|---|---|
| Conventional | Standard mortgage offered by private lenders | 620 | 3% |
| FHA | Mortgage backed by the Federal Housing Administration with low down payment, low closing costs, and easier credit requirements | 500 | 3.5% if credit score is 580+; 10% if credit score is 500-579 |
| VA | Loan for military servicemembers and surviving spouses | 580-620 | 0% |
| USDA | Zero down payment mortgage for low- to moderate-income borrowers to buy homes in qualifying rural areas | 620 | 0% |
Although the minimum down payment requirement for an FHA loan is higher than with a conventional 97 loan, the credit score and DTI requirements are more flexible, potentially making it easier to qualify.
Related reading: Conventional loans vs. FHA: Which Mortgage Is Better?
Start by getting preapproved with a lender to determine whether you qualify for a conventional 97 loan. A lender can tell you the loan options available to you and help you choose the right one for your circumstances. Note that some conventional 97 loan programs are only available to first-time homebuyers.
Generally speaking, you’ll need a minimum credit score of 620 and a down payment of at least 3% to be eligible for a conventional loan. In some cases, the lender may require you to complete a homebuyer education course before the loan closes. You will also need to meet any additional requirements set by the lender or program.
Conventional loans require a down payment of at least 3%. However, those who have higher debt-to-income ratios or lower credit scores may be required to put down a higher amount.
From a down payment perspective, buying a home is easier than ever, as you can put down as little as 3%. But choosing the right loan program, conventional or otherwise, comes down to the specifics of your finances.
A seasoned mortgage lender will be able to provide details on all of your homebuying options and help you take the next step toward owning your new home.
*Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income. **Loan-to-Value (LTVs) and Combined Loan-to-Value (CLTVs) may vary by loan amount.
Fairway is not affiliated with any government agencies. These materials are not from the VA, HUD, FHA, USDA, or RD, and were not approved by a government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.
