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What is a Conventional 97 loan?
To compete with low down payment mortgage programs like FHA, which are geared towards first-time homebuyers. Fannie Mae and Freddie Mac created the HomeReady and Home Possible loan programs.
The number one hurdle first-time homebuyers face is coming up with the large down payment required for a conventional loan, which can be as high as 20%. With all the benefits of conventional loans and now requiring just a 3% down payment, the conventional 97 loans are perfect for first-time buyers.
Conventional 97 Loan Requirements
- Maximum 43% Debt-to-income ratio
- Minimum 680 credit score
- One of the borrowers must not have owned a house in the past 36 months
- Single Family Homes, PUD, condos, townhomes, CO-OP are eligible
- Owner-Occupied buyers only, no real estate investors
- Maximum LTV ratio of 97 percent
Types of Conventional 97 Loans
Fannie Mae HomeReady Loan
To be able to compete with FHA loans, which require just a 3.5% down. Fannie Mae created the HomeReady loan program for low-income first-time homebuyers, in which just a 3% down payment is needed with a 620 credit score.
HomeReady loans are strictly for low-to-median income home buyers. To qualify, your annual income cannot exceed 80% of the area median income (AMI).
HomeReady Loan Requirements
- 620 credit score
- 3% down payment
- 50% maximum debt-to-income ratio
- Income limit of 100% of AMI
- Available for primary residence only
- Two years of stable employment
- W2’s, tax returns, bank statements, pay stubs
Freddie Mac Home Possible Loan
Freddie Mac also has their own 3% down home loan specifically for low-income first-time homebuyers called the Home Possible loan program. As with HomeReady loans, there is an income limit of 80% of the area’s median income, and a minimum 640 credit score is needed to qualify.
Home Possible Benefits
- Low 3% down payment
- Use alternate income sources
- Fixed monthly mortgage payments
- Low mortgage rate
- Low PMI rates
- Fixed-rate mortgage
- PMI is canceled at 80% LTV
Conventional 97 Loans vs. FHA Loans
When comparing FHA loans to conventional 97% LTV loans, the similarities stop at the low downpayment.
- Income – FHA loans do not have income limits like some types of conventional 97 home loans, making FHA the only option for a low down payment and credit score for borrowers with bad credit who make more than the conventional 97 income limits.
- Credit – Conventional 97 loans require a 680 credit score, which is more than other conventional home loan programs. An FHA mortgage requires a 500 credit score with 10% down, or a 580 credit score with 3.5% down.
- Mortgage insurance – FHA-insured loans have two types of mortgage insurance premiums, an upfront MIP fee of 1.75% of the loan amount plus annual MIP, which will be included in your mortgage payment. Conventional 97 loans require private mortgage insurance (PMI), which is included in your monthly payment but does not have an upfront mortgage insurance fee.
Key benefits of each loan
- 500 credit score with 10% down, 580 credit score with 3.5% down
- Debt-to-income ratio up to 50%
- Downpayment can be a gift
- Sellers can contribute up to 6% towards the buyers closing costs
- Student loans in deferment are not counted against DTI ratio
- Low-interest rates
- Flexible qualifying guidelines.
- Loan is assumable
Conventional 97 Pros
- No upfront private mortgage insurance (PMI) is required.
- PMI cancels when the LTV ratio reaches 78%
- Low 3% down payment
- Down payment can be a gift.
- Higher loan limits
Conventional 97 Loan Rates
There is a slightly higher interest rate that comes with the conventional, typically no more than a quarter percent higher. However, the borrower will be saving more upfront costs with the lower down payment requirement. The slight increase in the rate will equate to roughly $45 per month on a $200,000 mortgage.
Other Low and No Down Payment Home Loans
- VA Loans – Home loans available to veterans that require no down payment or mortgage insurance
- USDA Loans – Mortgage program for low-to-median income borrowers in rural areas of the country.
- FHA Loans – Borrowers with a 580 or higher credit score are eligible with just a 3.5% down payment.
- HomeReady/ Home Possible Loans – 3% down payment requirement for low-income borrowers with a 620 credit score.
Frequently Asked Questions
What is the minimum credit score needed for a conventional 97 loan?
The typical minimum credit score requirement is 680 to be eligible for the conventional 97 program.
What is cheaper, conventional, or FHA loans?
Conventional 97 loans are typically cheaper because the PMI will cancel at 78% LTV, and mortgage insurance rates are lower.
Can I use down payment gift funds for the conventional 97 Loan?
Yes. Borrowers can have 100% of their down payment gifted from a friend or family member.
Am I able to use a conventional 97 loan to buy a condo or townhome?
Yes. Borrowers can purchase a condo, townhouse, or Co-op if it is a 1 unit property.
Can I refinance my house using the 3% down conventional program?
Yes. You can refinance up to 97% of the value of your house if you have a Fannie Mae loan.
Why can I only qualify if I’m a first-time homebuyer?
Fannie Mae and Freddie Mac created the low-down-payment home loan programs to help first-time homebuyers purchase a home. Since the most significant barrier for first-time buyers is the down payment, they created the 3% down program to increase the number of loans issued to first-time buyers.
What is the maximum debt-to-income ratio?
The DTI requirements will vary depending on your credit score. The maximum DTI for the 3% down conventional mortgage program is 50%
How much is private mortgage insurance?
The amount of mortgage insurance will vary depending on your credit score. You will pay roughly $75-$125 per month per $100,000 borrowed.
Can I use a conventional 97 loan to purchase an investment property?
Unfortunately not, the 97 LTV mortgage program is for owner-occupied borrowers only.