3 percent down mortgage
Today’s home buyers have a wide variety of low- and no-down payment mortgage options.
You’ve likely heard of the 3.5% down FHA loan. But many first-time home buyers don’t know about Fannie Mae and Freddie Mac’s 3-percent-down mortgages.
The HomeReady and Home Possible loans are geared toward lower-income home buyers, with flexible guidelines that make homeownership more accessible.
By contrast, the conventional 97 loan is available at any income level. It’s great for homebuyers who might otherwise qualify for a loan but lack the resources — or the desire — to make a 5% down payment or more.
These 3-down mortgage loans launched a few years ago.
Now, they’re among the most in-demand programs for today’s home buyers.
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3% down mortgage eligibility
Fannie Mae and Freddie Mac — the agencies that set the rules for
‘conforming loans’ — offer three low-down-payment mortgage programs.
These 3 percent mortgages open the door for home buyers who don’t
have the ‘typical’ conventional loan down payment of 5% or more.
97 loan — 3% down payment mortgage for first-time and repeat home buyers.
No income limits
loan — 3% down mortgage from Fannie Mae. Income limits apply
Possible — 3% down mortgages from Freddie Mac. Income limits apply
The main difference between these programs is their target audience.
The HomeReady and Home Possible programs are mainly intended for low-income and moderate-income home buyers, as well as intergenerational households and buyers in certain ‘minority neighborhoods.’
They have special flexibilities that make homeownership more affordable for eligible borrowers, like the ability to use renter or roommate income to help you qualify.
Both programs are available to first-time and repeat home buyers,
although they’re generally geared more toward first-timers.
The conventional 97 has a wider appeal. It’s a great option for home
buyers who have good credit but modest savings — or for buyers who want to make
a small down payment so their money’s not tied up in real estate and they can
invest it elsewhere.
Aside from these differences, the conventional 97, HomeReady, and
Home Possible have similar rules for qualifying:
- Minimum credit score of 620
- Reliable income and employment
- Clean credit report (no foreclosures or bankruptcies in recent years)
- Debt-to-income ratio (DTI) under 43%, in most cases
- The home must be a ‘primary residence’ (you’ll live there full-time)
- Mortgage can’t exceed conforming loan limits; currently $548,250 in most areas
- A first-time home buyer education course may be required
- The down payment and closing costs can be covered with gift funds and/or down payment assistance programs
Many mortgage lenders are authorized to do all three types of loans.
It’s a good idea to shop around for a lender that does. Then your loan officer
can help you compare requirements and rates to see which is the best fit for
The conventional 97 mortgage
Today, more and more lenders are offering the 3% down conventional
97 mortgage as an alternative to the standard 5% minimum down payment.
This loan might be perfect for you if:
- You have
good credit or excellent credit but modest savings
- You don’t
want to spend all your savings on a down payment and closing costs
- You want
to cancel private mortgage insurance as soon as you can
- You want
to buy a more expensive home than FHA loan limits allow
Unlike the HomeReady and Home Possible loans, the conventional 97 mortgage has no income limits. So it’s a better choice if you make a substantial income, or if you want to buy with a partner or co-borrower and your combined incomes would be above the allowable limit.
The conventional 97 mortgage is a bit more flexible than Fannie and Freddie’s other 3%-down options. But it still has tighter restrictions than a conventional loan with 5%, 10%, or 20% down.
For instance, you must buy the home as your primary residence. Investment properties and vacation homes aren’t allowed under the conventional 97 program.
And, if all borrowers on the loan application are first-time buyers, a homeownership education course is required. (Though this shouldn’t be seen as a con, because these courses can be very valuable.)
Some home buyers choose to make a bigger down payment because it lowers their mortgage rate and monthly payments.But, a large down payment is not required.
By making a smaller down payment now, buyers can avoid rising home prices and start building home equity. The choice is up to you.
The Fannie Mae HomeReady mortgage
Fannie Mae’s HomeReady mortgage program is a great loan option for
lower-income buyers. Some of the key benefits include:
- Renter income can be counted on your application
- Income from non-borrowing occupants can count on your loan application if you’ve lived with them for at least a year
- You’re not required to spend anything out of pocket. 100% of your down payment and closing costs can come from gifted funds or down payment assistance (DPA)
The flexibility to count additional sources of income toward your mortgage qualification is almost unmatched by any other loan type.
This makes the HomeReady loan especially attractive for multigenerational households with working parents and children; home buyers who want to rent one of their rooms out; and borrowers who have a roommate but want to purchase the home on their own.
You can even use the HomeReady loan to buy a 2-, 3-, or 4-unit property and rent out the extra units for additional income, as long as you live in one yourself. But be aware that multifamily loan requirements are a little bit stricter.
Also note that the total household income on your loan application can’t exceed Fannie Mae’s limit, which is set at 80% of your area’s local median income. You can find your local median income using Fannie Mae’s Lookup Tool.
The Freddie Mac Home Possible mortgage
Freddie Mac’s Home Possible Mortgage is very similar to Fannie Mae’s
- Income limits are set at 80% of the local median
- Boarder income can be counted on your application if the renter has lived with you for at least one year
- The full down payment and closing costs can come from gift funds or down payment assistance (DPA)
A key difference, though, is that Freddie Mac will count only
renter income toward your application. The income of other household occupants,
like family members and roommates, can’t be considered.
Like Fannie Mae, Freddie Mac allows borrowers to purchase a 2-4 unit property with 3% down, as long as the homeowner lives in one of the units full time.
is a ’97 LTV mortgage’?
You might see these loan programs referred to as ’97 LTV mortgages.’ LTV stands for ‘loan-to-value ratio,’ a measure that compares your loan amount to your home’s market value.
In the case of a 97 LTV mortgage, your loan amount is 97% of your
LTV is another way to talk about down payments. If a loan has a 3%
down payment requirement, then the maximum LTV possible is 97%, because
you’re contributing at least 3% of the purchase price out of pocket.
Thus, the conventional 97, HomeReady, and Home Possible loans are
all ’97 LTV mortgages.’
Other low-down-payment and no-down-payment mortgage
With the introduction of the Conventional 97 home loan, the U.S.
government is making it easier for potential buyers to become homeowners.
Fannie Mae and Freddie Mac join the FHA, VA, and USDA in
offering low-down-payment loans to buyers nationwide.
The conventional 97’s attractive terms
have helped it grab market share from the FHA loan, which is another popular low-down-payment
option backed by the Federal Housing Administration.
The FHA loan has its place, though.
loans require a down payment of 3.5% and you only need a FICO score
of 580 to qualify.
borrowers with credit scores between 580 and 620, an FHA loan is typically the
only viable option. And home buyers with less-than-perfect credit — even
above 620 — may find FHA loans to be more cost-effective than the conventional
with better-than-average credit scores, though, typically save by using
the conventional 97.
VA loans are another popular comparison product for the conventional 97.
to veterans and active-duty service members in the U.S. military, VA
loans allow for 100 percent financing and never require ongoing
mortgage insurance — only a one-time funding fee.
mortgage rates are typically around 25 basis points (0.25%)
below rates for a comparable conventional loan, and VA loans are backed by the
Department of Veterans Affairs.
USDA loans are a third comparison option.
loans are guaranteed by the U.S. Department of Agriculture. Although they’re
sometimes called “Rural Housing Loans,” these
loans can be used in many suburban locations, too. The
USDA’s definition of ‘rural area’ covers most of the U.S. landmass.
USDA loans offer very low rates and allow for 100% financing. They also have lower mortgage insurance rates than FHA loans and most conventional mortgages.
In short, today’s home buyers have plenty of financing options. Often the question is not “Can I afford a home?”, but rather, “Which loan is most affordable for me?”
Private mortgage insurance (PMI) vs. FHA mortgage
insurance premium (MIP)
The conventional 97, HomeReady, and Home Possible loans all come with private mortgage insurance (PMI). This monthly fee — which protects the mortgage lender in case of default — is required on all conventional loans with less than 20% down.
FHA loans also come with mortgage insurance premiums (known as
So how do you know which is better?
For the right borrower, there are some clear benefits of choosing a
3-percent-down conventional loan over a low-down-payment FHA loan:
- Conventional loans do not charge an upfront mortgage insurance fee,
only and annual fee (paid monthly). FHA loans charge mortgage insurance upfront
- PMI can be canceled once you reach 20% equity. FHA mortgage
insurance typically lasts the life of the loan
- If you have a higher credit score, you get cheaper PMI rates. FHA
mortgage insurance rates are the same regardless of credit
That’s not to say a conventional loan is always better than FHA.
There are many cases where an FHA loan is more affordable (especially if you
have low credit).
For instance, if your credit is on the low end for a conventional
loan — right around 620 — and you make a 3% down payment, PMI could cost
significantly more than FHA mortgage insurance.
Home buyers should consider all their low-down-payment loan options
to see which one has the best balance between interest rate, upfront fees,
mortgage insurance, and long-term costs.
The ‘right’ loan type will be different for each borrower.
3 percent down mortgage FAQ
Yes! The conventional 97 program allows 3% down and is offered by many lenders. Fannie Mae’s HomeReady loan and Freddie Mac’s Home Possible loan also allow 3% down with extra flexibility for income and credit qualification. FHA loans come in a close second, with a 3.5% minimum down payment.
To qualify for a 3% down conventional loan, you typically need a credit score of at least 620, a two-year employment history, steady income, and a debt-to-income ratio (DTI) below 43%. If you apply for the HomeReady or Home Possible loan, there are also income limits. FHA loans allow a minimum FICO score of 580 and no income limits, but have a 3.5% down payment requirement.
Yes. You can use the 3-percent-down conventional 97 loan if you are a first-timer or repeat buyer.
For most programs, you’re a first-time homebuyer if you have not owned a home within the last three years. There are other exceptions to this rule for those with homes that can’t be repaired to livable standards, those with mobile homes (personal property), and others.
No, these are two different mortgage programs. The HomeReady loan is aimed at applicants who meet income eligibility guidelines, putting them in the low or moderate-income categories. The conventional 97 has no income limits and is more widely available.
There is no limit to the size of your down payment with a conventional loan. Although if you put down 5% or more, you will no longer be using the conventional 97 mortgage, but rather a ‘conventional 95’ loan. With 10% down or more it’s just a ‘standard’ conventional loan. The bigger your down payment, the lower your interest rate and monthly payments.
There is no “best” low-down-payment mortgage program. What’s best for one home buyer may not be what’s best for another. Each program has its benefits and drawbacks. To find the right program you should compare interest rates, mortgage insurance rates, upfront fees, and interest paid over the life of the loan. Consider how long you’ll stay in the home and how much you want to pay upfront.
No, the conventional 97 does not allow adjustable-rate mortgages, only fixed-rate mortgage loans with terms ‘up to 30 years.’
Conventional loans with 3 percent down must meet Fannie Mae’s standard conforming loan limit of $548,250. ‘High-balance conforming loans,’ those with higher loan limits in expensive areas, are not allowed under the conventional 97 program.
The conventional 97 program allows only single-family primary residences (meaning a one-unit house, condo, or co-op). However, the 3%-down HomeReady and Home Possible loans allow 2-, 3-, and 4-unit properties.
No, the 3 percent down payment program is for primary residences only. You’ll need a different loan for vacation or second homes.
No, the 3 percent down-payment program is for primary homes only. You can’t finance a rental or investment property with this product.
If all borrowers on the mortgage application are first-time home buyers, at least one borrower will need to attend an online home buyer education course.
Yes, mortgage applicants must pay private mortgage insurance (PMI) premiums. However, unlike FHA loans, conventional PMI can be canceled once the homeowner has at least 20% home equity.
No, the loan you refinance must be a Fannie Mae home loan.
To determine if Fannie Mae backs your current loan, ask your lender or use Fannie Mae’s online loan lookup tool.
No, the 97 percent mortgage program does not allow cash-out refinances. Borrowers may do a cash-in refinance or a “limited cash-out” refinance only.
3-percent-down mortgage rates
Today’s mortgage interest rates are at historic lows. That includes
rates for conventional 97, HomeReady, and Home Possible loans.
A low-down-payment mortgage paired with a low interest rate can make
homeownership more affordable than you might have expected.
Check your rates and eligibility today to see what you can afford.