What is the conventional 97 loan program?
The Conventional 97 program allows homebuyers to get a conventional mortgage loan with only 3% down.
The program is named for the 97% of the home value that is financed by the lender after the buyer makes a 3% down payment.
The loan program can finance a single-family home or condo unit — as long as the buyer plans to use the home as a primary residence.
Conventional 97 offers an alternative to FHA loans, which require a similar 3.5% down payment.
In this article:
- Conventional 97 loan guidelines
- Credit score requirements
- Conventional 97 mortgage rates
- Conventional 97 vs FHA and other loan types
- Conventional 97 loan FAQ
- How to get a Conventional 97 Loan
Aside from requiring only 3% down, Conventional 97 loans work a lot like other conventional mortgage loans.
But this loan program works only for first-time home buyers — defined as buyers who haven’t owned a home in the past three years.
Here are some other Conventional 97 loan qualifications:
- The loan must be a fixed-rate mortgage
- The property must be a one-unit single-family home, co-op, PUD, or condo
- At least one buyer must not have owned a home in the last three years
- The property must be the owner’s primary residence
- At least one borrower must take a homebuyer education course
- The loan amount must be at or below $647,200
These features align well with the typical first-time homebuyer’s profile.
For instance, most buyers today are looking for a one-unit home — as opposed to a duplex or triplex — or a condo that they plan to live in as their primary residence. First-time buyers are also likely to be seeking something with a lower purchase price.
Today’s average home price is around $350,000 according to the National Association of Realtors, putting a Conventional 97’s average down payment at $10,500 — within reach for many home shoppers.
By comparison, making a 20% down payment would require $70,000 upfront.
Many homebuyers assume they need impeccable credit scores to qualify for a loan that requires only 3% down. That’s not the case.
According to Fannie Mae’s Loan Level Price Adjustment (LLPA) chart, a borrower can have a score as low as 620 and still qualify for a 3% down loan.
How is this possible? Private mortgage insurance, or PMI, is one reason. When you put less than 20% down, you’ll pay these premiums which protect the lender in case you default.
This extra layer of protection for the lender enables the lender to offer lower rates.
Is it worth paying PMI?
PMI gets a bad rap. But paying it can unlock decades of savings on interest for new homeowners.
Yes, private mortgage insurance would make the 3% down option more expensive on a monthly basis, at first.
But the borrower’s down payment requirement is substantially lower, allowing them to buy a home much sooner — before house prices increase again.
And remember, you can cancel PMI when the loan’s balance reaches 80% of the home’s value. Lenders call this percentage your loan-to-value ratio, or LTV.
When LTV falls to 78% of the property’s value, PMI automatically drops off.
Mortgage rates for the 3% down payment program are based on standard Fannie Mae rates, plus a slight rate increase.
However, this fee or rate increase is often minimal compared to the value added from earlier home buying.
Someone buying a $300,000 home would pay about $80 more per month by choosing the 97% loan option compared to a 5% down loan.
Yet, the buyer reduces their total upfront home buying costs by over $5,000.
The time it takes to save an extra 2% down payment could mean higher real estate prices and tougher qualifying down the road. For many buyers, it could prove much cheaper and quicker to opt for the 3% down mortgage immediately.
Low down payment alternatives to Conventional 97 loans
Before Fannie Mae introduced 3% down payment conventional loans, more home buyers who needed a low down payment loan chose an FHA loan.
FHA loans are still the best choice for a lot of buyers. The Federal Housing Administration, which insures these loans, requires 3.5% down for most new home buyers, putting an FHA down payment in the neighborhood of a Conventional 97’s.
But unlike conventional loans, FHA loans allow credit scores below 620 — and as low as 580. Plus, the FHA doesn’t add Loan Level Price Adjustments like conventional loans.
So, if your credit is borderline — just barely good enough to qualify for a Conventional 97 — you might draw a better-rate loan from the FHA.
The catch is the FHA’s mortgage insurance. Unlike PMI on a conventional mortgage, FHA mortgage insurance premiums (MIP) won’t go away unless you put 10% or more down. You’ll keep paying the annual premiums until you pay off the loan or refinance.
The FHA also charges an upfront mortgage insurance premium. This one-time, upfront fee totals 1.75% of the loan amount for most borrowers.
Conventional 97 vs other government-backed loans
FHA isn’t the only government-backed loan program. Two other programs — USDA loans and VA loans — offer new home loans with no money down.
Unlike FHA and conventional loans, USDA and VA loans won’t work for just any borrower.
VA loans go to military members or veterans. They’re a perk for people who have served. And they’re an attractive perk. Along with putting no money down, VA borrowers won’t pay annual mortgage insurance — just an upfront funding fee.
Zero-down USDA loans work in rural and suburban areas and only for borrowers who earn less than 115% of their area’s median income. They also require a higher credit score — usually 640 or higher.
Conventional 97 vs other low down payment conventional loans
Fannie Mae and Freddie Mac offer more than one low down payment loan. So far in this post, we’ve been discussing Fannie’s standard 3% down mortgage.
But some borrowers may prefer:
- Fannie Mae’s HomeReady: This 3% down loan is designed for moderate-income borrowers. If you earn less than 80% of your area’s median income, you may qualify for HomeReady. What’s so good about HomeReady? In addition to low down payments, this loan offers reduced PMI rates which can lower your monthly payments
- Freddie Mac’s Home Possible: This 3% down loan works a lot like HomeReady. It adds the ability to use sweat equity toward the down payment. This can get complicated, and you’d need the seller’s approval in advance. But it is possible.
- Freddie Mac HomeOne: This 3% down loan resembles the standard Conventional 97 from Fannie Mae. Unlike HomeReady and Home Possible, there are no income limits to worry about.
Your loan officer can help identify the low down payment loan that works best for you.
What is a Conventional 97 loan?
A Conventional 97 is a conventional mortgage that requires only 3% down. It’s named for the remaining 97% of the home’s value that the mortgage will finance.
How do you qualify for Conventional 97?
Qualifying for a Conventional 97 loan requires a credit score of at least 620 in most cases. Debt-to-income ratio (DTI) should also fall below 43%. There are no income limits. Borrowers who already own a home or who have owned a home in the past three years won’t qualify.
Do all lenders offer Conventional 97?
Most lenders offer Conventional 97 loans. This product conforms to Fannie Mae’s rules. Lenders that offer Fannie Mae loans will likely offer this 3% down product.
Can closing costs be included in a conventional 97 loan?
No. As its name indicates, the Conventional 97 program can finance up to 97% of a home’s appraised value. Rolling closing costs into the loan amount would push the loan beyond this 97% threshold. However, many first-time homebuyers qualify for down payment and closing cost assistance grants and loans. Conventional 97 also allows gift funds. This means family members or friends could help you cover closing costs.
Who offers Conventional 97 loans?
Most private mortgage lenders — whether they’re online, downtown, or in your neighborhood — offer Fannie Mae conventional loans which include Conventional 97 loans.
Is there a minimum credit score for the 3% down payment program?
Borrowers need a credit score of at least 620 to get any Fannie Mae-backed loan. The exception would be those with non-traditional credit who have no credit score. Mortgage lenders can set their minimum credit scores higher than 620. Some may require 640 or 660, for example. Be sure to check with your mortgage lender to find out for sure.
Can I use down payment gift funds?
Yes. Fannie Mae states gift funds may be used for the down payment and closing costs. Fannie does not set a minimum out-of-pocket requirement for the buyer. You may also qualify for down payment assistance. Your mortgage officer can help you find programs in your state.
Can I buy a condo or townhome?
Yes. Buyers can purchase a condo, townhome, house, or co-op using the Conventional 97 program as long as it is only one unit.
Can I buy a manufactured home with 3% down?
No. Manufactured homes are not allowed with this program.
Can I buy a second home or investment property?
No. The 97% loan program may be used only for the purchase of a primary residence.
I owned a home two years ago but have been renting since. Will I qualify?
Not yet. You must wait until three years have passed since you had any ownership in a residence. At that point, you are considered a first-time home buyer and will be eligible to apply for a Conventional 97 loan.
Will mortgage insurance companies provide PMI for the 97% LTV home loan?
Yes. Mortgage insurers are on board with the program. You do not have to find a PMI company since your lender will order mortgage insurance for you.
How much is mortgage insurance?
Mortgage insurance varies widely based on credit score, from $75 to $125 per $100,000 borrowed, per month.
Can I get a conforming jumbo loan with 3% down?
No. This program won’t let lenders exceed conforming loan limits. At this time, high balance, also known as conforming jumbo loans — those over $647,200 — are not eligible.
I’m already approved putting 5% down, but I’d like to make a 3% down payment instead. Can I do that?
Yes. Even if you’ve already been through the underwriting process, your lender can re-underwrite your loan if it offers the Conventional 97 program. Keep in mind your debt-to-income ratio will rise with the higher loan amount and potentially higher rate.
What’s the maximum debt-to-income (DTI) ratio for the 97% LTV program?
Your overall profile including credit score determines your DTI maximum. While there’s no hard-and-fast number, most lenders set a maximum DTI at 43%. This means that your future principal, interest, tax, insurance, and HOA dues plus all other monthly debt payments (student loans, credit card minimum payments) can be no more than about 43% of your gross income.
Can I use the 3% down program to refinance?
Yes. If you have an existing Fannie Mae loan, you may be able to refinance up to 97% of the current value. Refinancing might allow borrowers to lower their monthly payments or eliminate mortgage insurance premiums.
Why is the program only for first-time home buyers?
Fannie Mae’s research uncovered that the biggest barrier to homeownership for first-time homebuyers was the down payment requirement. To spur more people to buy their first home, the minimum down payment was lowered.
Are there income limits?
The standard 3% down program does not set limits on your income. However, the HomeReady 97% loan does require the borrower to be at or below 80% of the area’s median income.
What is a HomeReady mortgage?
HomeReady is another program that requires 3% down. It has flexibilities built-in, such as using income from non-borrowing household members to qualify.
What is the Home Possible Advantage program?
This is Freddie Mac’s 3% down home buying program. It is a lot like Fannie Mae’s HomeReady. Borrowers must not make more than set income limits and must be buying a primary residence.
The Conventional 97 mortgage program is available immediately from lenders across the country. Talk with your lenders about the loan requirements today.
The ability to put only 3% down could open doors for you.