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Buying a home is an exciting milestone in life. However the down payment is often a major obstacle, especially for first-time homebuyers. With rising home prices, saving 20% for a down payment can take years. But what if I told you that you may be able to buy a home with as little as 3% down using a conventional loan? Keep reading to learn more!
What Is A Conventional 3% Down Loan?
A conventional 3% down loan, also called a 97% LTV loan, allows you to purchase a home with just 3% down payment. The loan covers up to 97% of the purchase price.
Unlike government-backed FHA and VA loans, conventional loans are not insured by a federal agency. Instead, they are underwritten by private mortgage lenders and investors like banks. The 3% down conventional loan options include:
- Conventional 97: No income limits, available for all buyers with good credit
- HomeReady: For low-to-moderate income buyers, offered by Fannie Mae
- Home Possible: For low-to-moderate income buyers, offered by Freddie Mac
These 3% down conventional loans have opened homeownership to buyers who don’t have a 20% down payment saved but can still afford a monthly mortgage.
Conventional 97 Loan: Low Down Payment Option For All Buyers
The Conventional 97 mortgage is a game-changer, allowing any buyer to purchase a home with only 3% down regardless of their income. Here are some key features:
- No income limits – Available for buyers at any income level
- 3% minimum down payment – Lowers the savings needed to buy a home
- PMI required – Private mortgage insurance protects the lender
- Primary residence only – Can’t be used for investment properties
- Good credit required – Minimum 620 FICO score
Ideal for first-time buyers who want flexibility of a conventional loan but can’t afford a huge down payment. The Conventional 97 mortgage opens doors to buyers who have good credit but lack substantial cash reserves.
Benefits Of A 3% Down Conventional Loan
1. Lower Down Payment
The obvious benefit is needing less cash upfront, making homeownership more accessible. On a $300,000 home, you’d only need $9,000 instead of $60,000!
2. Avoid PMI Sooner
With a conventional loan, PMI can be removed once you reach 20% equity. With FHA, PMI lasts for the entire loan term.
3. No Limit On Gifted Funds
The full down payment amount can come from gifts or grants. No need to deplete your savings.
4. Available For All Buyer Types
No restrictions on income, assets, or first-time buyer status like some government loans. The Conventional 97 loan works for almost anyone with good credit.
5. May Offer Lower Rates
Conventional loans can offer lower mortgage rates than FHA or USDA loans, saving you money each month.
HomeReady & Home Possible: 3% Down For Low-Income Buyers
In addition to the Conventional 97, Fannie Mae and Freddie Mac offer two other 3% down conventional loans specifically geared for low-to-moderate income buyers:
HomeReady Mortgage
- Income limit: 80% of area median income
- Gifts and grants allowed for down payment & closing costs
- Boarder income can help qualify
Home Possible Mortgage
- Income limit: 80% of area median income
- Gifts and grants allowed for down payment & closing costs
- Rental income can help qualify
These programs offer extra flexibility and assistance to make homeownership affordable. The income limits ensure that loans go to buyers who truly need low down payment options.
Requirements For A 3% Down Conventional Loan
While more flexible than government loans, conventional 97% LTV loans do have stricter criteria than a 5% down or 10% down conventional mortgage. Requirements include:
- Minimum 620 credit score
- Low debt-to-income ratio (usually under 43%)
- Clean credit history with no recent major derogatory marks
- Steady income and employment history
- Loan amount below conforming limits
- Primary residence only
- First-time buyers may need homebuyer education
Meeting these standards ensures you can manage the monthly mortgage payments and conventional loans remain low risk for lenders.
Alternatives To A 3% Down Conventional Loan
If you don’t qualify for a conventional 3% down loan, alternatives may include:
FHA loan – Minimum 3.5% down payment with flexible credit and debt requirements. However, mortgage insurance lasts the full loan term.
VA loan – No down payment required for veterans and active duty military. Can only be used on primary residence.
USDA loan – No down payment required for low/moderate income buyers in rural areas. Credit score and income requirements apply.
Talk to a lender to review all your low and no down payment options!
How Much More Will I Pay With 3% Down?
With only 3% down, you are borrowing more and will pay more in interest over the long run compared to larger down payments. You also have to pay private mortgage insurance (PMI) until you reach 20% equity in the home.
On a $300,000 home, here’s how 3% down compares to 20% down:
| Loan Terms | 3% Down | 20% Down |
|---|---|---|
| Loan Amount | $291,000 | $240,000 |
| Monthly Payment* | $1,350 | $1,115 |
| Total Interest | $215,000 | $170,000 |
| Total Cost | $506,000 | $410,000 |
* Estimated payment based on 3.5% interest rate on a 30-year fixed rate mortgage
While the higher monthly payment and long-term costs need to fit your budget, a 3% down conventional loan makes buying a home possible years sooner!
Ready To Explore 3% Down Conventional Loans?
A conventional mortgage with only 3% down opens the doors to homeownership for buyers who don’t have a large down payment saved but have good credit and income. Whether you choose the widely available Conventional 97 loan or a specialized program like HomeReady, you can buy a house sooner with less cash out of pocket. Meet with a lender to go over your options and prequalify today!
Fannie Mae’s HomeReady program
Also backed by Fannie Mae, the HomeReady program lets you use financing to buy a more varied array of properties, including a single-family home, a residential building with up to four units or a condo. The eligibility requirements for HomeReady include:
- Previous homeownership limits: Open to applicants who have not owned a primary residence during the past three years.
- Homeownership education course: Applicants who are first-time buyers must take a homeowner education course.
- Credit score: Applicants must have a minimum credit score of 620.
- Income requirements: Applicant’s income cannot exceed 80 percent of the area’s median income.
- Residential requirements: Can be a multi-family building, but at least one unit must be owner’s primary residence.
The HomeReady program also includes more flexible underwriting requirements that allow you to count rental income toward your income requirements. In addition, while a 3 percent down payment is standard, you’re actually not required to dig into your own pockets at all with this mortgage: 100 percent of your contribution can come from money received as gifts and down payment assistance.
Similar to the Conventional 97 program, Fannie Mae HomeReady mortgages are offered by a variety of private lenders. You do not apply directly through Fannie Mae. You can find lenders offering this mortgage with a simple internet search.
Freddie Mac’s Home Possible program
Similar to Fannie Mae’s HomeReady program, Freddie Mac’s Home Possible program has similar terms. One big distinction: It allows non-occupying co-borrowers to contribute funds to the 3% down payment for one-unit properties. Some of the requirements for Home Possible include:
- Homeownership education course: First-time homebuyers must participate in homeownership education.
- Credit score: Applicants must have a credit score of 660.
- Income limits: Applicant income cannot exceed 80 percent of the area’s median income.
- Private mortgage insurance: Must pay PMI premiums.
- Residential requirements: Must live in the home as your primary residence.
In addition to the program features listed above, once you reach 20 percent equity in the home, you can eliminate mortgage insurance, which reduces your monthly mortgage payment.
Home Possible mortgages are not available directly from FreddieMac. You’ll need to shop around to find lenders who participate in this program. Because of the income limits associated with HomePossible mortgages, they are not as widely available as some other types of mortgage programs.
Freddie Mac also backs the HomeOne program. These mortgages are designed both for applicants who have limited down payment funds for a home purchase and for homeowners interested in a cash-out refinance. Requirements to obtain a HomeOne mortgage include:
- First-time homebuyer: At least one of the applicants must be a first-timer: never have owned a home before, or at least for the last three years.
- Credit score: At least one applicant must have what Freddie Mac deems a usable credit score —meaning a score that’s based on enough history to determine that the individual has a track record of being a responsible borrower, or an “acceptable credit reputation,” as Freddie Mac guidelines put it.
- Homeownership education course: If all borrowers involved in the purchase are first-time buyers, a homebuyer education course is required.
- Residential requirements: All borrowers must occupy the home as their primary residence.
- Eligible homes: HomeOne can only be used to purchase single-unit properties, which can include townhouses or condos. It cannot be used to buy manufactured homes.
Unlike other 3-percent down mortgage programs, there are no income limitations associated with the HomeOne loan. There are no geographic or location limitations for this program either.
Those making a small down payment are required to pay for private mortgage insurance: The program requires PMI with mortgages that have an LTV of over 95 percent. As with the other programs, the mortgage insurance may be canceled once the homeowner has built up a 20 percent equity stake in the home.
Similar to the other mortgage programs, HomeOne is not available directly from Freddie Mac. Instead, you’ll need to research and find a private lender offering it (typically one that participates in Freddie Mac programs).
The 3% Down Conventional Loan No One Is Talking About
FAQ
Can I put 3% down with a conventional loan?
Is a conventional loan only requires 3% down to qualify for the loan?
Is 3% enough for a down payment?
Can you get a mortgage with 3 percent down?
What is a 3% down conventional loan?
A 3% down conventional loan is a popular option for many first-time home buyers looking for less stringent credit and down payment requirements. The amount of money that you have to put down is usually pegged on the purchase price of the home you’re buying, which is usually one of the biggest hurdles to overcome when applying for a home loan.
Do you need a down payment for a conventional mortgage?
Here are the key points: 1.**Minimum Down Payment**: Conventional loans typically require a minimum down payment of **3%** of the home’s purchase price.This is great news for **first-time homebuyers**
What is a 3% down payment mortgage?
If you have good credit, a 3% down payment conventional loan is often the best choice. The Conventional 97, HomeReady, and Home Possible loans are all affordable options with just 3% down. For borrowers with lower credit, an FHA loan with 3.5% down is an excellent alternative. Ready to explore your 3% down mortgage options? Get started here.
What is the lowest down payment for a conventional mortgage?
If you owned a home within the last 3 years, the lowest down payment you can make for a conventional loan is 5%. A key benefit of making a 5% down payment is that you’ll qualify for an adjustable-rate mortgage (ARM). These types of mortgages can help you save money in the long run if you plan to sell the home within 10 years.