Fannie Mae is expanding credit for eligible borrowers and supporting sustainable homeownership. How? By providing 97% loan-to-value (LTV) financing options that help lenders better serve first-time homebuyers.
To qualify for purchase loans with an LTV greater than 95%, homeownership education will be required for at least one borrower, when all occupying borrowers are first-time homebuyers. Fannie Mae HomeView® can be used to satisfy this requirement.
Fannie Mae permits borrowers to obtain down payment and closing cost assistance from third party sources.
Putting together a large down payment can be one of the biggest obstacles for many prospective homebuyers. But conventional loans allowing as little as 3% down can make homeownership more accessible. This guide covers everything you need to know about getting a conventional mortgage with only 3% down.
What Are Conventional 3% Down Loans?
Conventional loans are mortgages that are not backed by a government agency like FHA or VA loans. They are issued by private lenders and conform to guidelines set by Fannie Mae and Freddie Mac.
Traditionally, conventional loans have required a down payment of at least 20%. But Fannie Mae and Freddie Mac have created special conventional loan programs that allow down payments as low as 3% for qualified borrowers. These are called 97% LTV loans because they cover 97% of the home’s value.
The two main conventional 97% LTV programs are:
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Fannie Mae Conventional 97: Allows 3% down for first-time homebuyers who complete a homebuyer education course.
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Freddie Mac HomeOne Allows 3% down for first-time buyers or those who haven’t owned a home in 3 years. Homebuyer education is required.
These programs make homeownership more affordable by reducing the cash needed upfront. With only 3% down, you can buy a $300000 home by saving just $9000 rather than $60,000.
Conventional 97 Loan Requirements
To qualify for a conventional 97% LTV mortgage, you must meet certain criteria:
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First-time homebuyer: At least one borrower must be a first-time buyer or not have owned a home in the past 1-3 years.
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Primary residence You must occupy the home as your primary residence
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Loan limits: The purchase price cannot exceed conforming loan limits – typically $726,525 to $970,800 depending on location.
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Credit score: Minimum credit scores range from 620-680. Requirements vary by lender.
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Debt-to-income ratio: Your total monthly debt payments cannot exceed 45% of gross monthly income in most cases.
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Homebuyer education: First-time buyers must complete an approved homebuyer education course.
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Down payment: You must make a down payment of at least 3% of the purchase price from your own funds or eligible sources like gifts.
As long as you meet these requirements, 97% financing allows first-time buyers to purchase a home with a very small down payment.
Private Mortgage Insurance with 97% LTV Loans
One catch with conventional 97% financing is that you’ll have to pay private mortgage insurance (PMI). PMI protects the lender in case you default on a high LTV loan.
PMI premiums are based on your credit score and loan amount. On a $300,000 home purchase with 3% down, PMI may cost $100-200 extra per month.
You can request to cancel PMI once you build 20% home equity. With 97% financing, that may take 8-10 years depending on the rate at which you pay down your loan.
Sources to Fund a 3% Down Payment
Coming up with even a small 3% down payment can be difficult for some buyers. Here are a few options for funding a low down payment:
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Personal savings: Save over time in a high-yield savings account or down payment fund. Make regular contributions from your paycheck.
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Gift funds: Request help from a relative for part or all of the down payment as a gift. Lenders allow this with proper documentation.
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Down payment assistance: Check if your state/city offers DPA grants for 3-5% of the purchase price to cover down payments and closing costs. Income limits apply.
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Company assistance: Some employers provide down payment aid as an employee benefit. This is often in the form of a grant or no-interest second loan.
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IRA or 401(k) withdrawals: You can make a limited withdrawal from a retirement account for a first-time home purchase without penalty.
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Seller contributions: Ask the seller to cover 3% of the sale price toward closing costs and your down payment credit.
Finding the Best Conventional 97% Lender
Conventional 97% loans aren’t offered by every mortgage lender. Your options may include large banks, credit unions, and online lenders.
Shop around and compare multiple lender quotes. Look for these features:
- Low interest rates and fees
- Flexible credit score requirements
- Down payment assistance programs
- Strong customer service and accessibility
Narrow down your options to 3-4 top conventional loan lenders. Submit loan applications to compare pre-approvals and estimated PMI costs. Choose the lender that offers the best all-around value on your 97% financing.
Pros and Cons of Conventional 97% Loans
| Pros | Cons |
|---|---|
| Requires only 3% down | Must pay PMI |
| No usage restrictions | Higher interest rate than 20% down |
| Buy sooner than saving 20% down | Less equity at purchase = less price appreciation |
| Low down payment options like gifts | Potentially riskier if home prices decline |
| No first-time homebuyer requirements with some lenders | May take years to build 20% equity and drop PMI |
For buyers without a full down payment saved up, conventional 97% loans allow you to purchase with just 3% down. This gets your foot in the door to homeownership years sooner.
Just be aware that with less equity invested, your mortgage payments will be higher due to PMI. And you’ll have to wait longer to build enough equity to drop PMI and take full advantage of home price appreciation over time.
Alternatives to Conventional 97% Loans
If you don’t qualify for a conventional 97% mortgage, here are a couple alternatives that also allow low down payments:
FHA loans – Require just 3.5% down and are more lenient with credit scores as low as 580. But FHA loans charge mortgage insurance for the full loan term.
VA loans – Offer 0% down payment options for veterans and active military. But you must be eligible based on service history.
USDA loans – Offer 0% down loans for low-income buyers purchasing in designated rural areas. Availability depends on location.
Down payment assistance programs – State and local groups provide down payment grants for 3-5% down to qualified buyers based on income limits.
Adjustable-rate mortgages – ARM loans sometimes allow higher LTV ratios above 97%, but the interest rate and payment adjust over time.
Piggyback loans – Combine a first mortgage with a second piggyback mortgage rather than a large down payment.
The Bottom Line
Thanks to conventional 97% financing, you can now buy a home with as little as 3% down plus closing costs. This opens up homeownership to motivated buyers who are still saving up for a full 20% down payment. Just be prepared for trade-offs like higher monthly costs due to PMI.
Do your homework and search for lenders offering both competitive rates and down payment assistance programs. If you don’t qualify for a conventional 97% loan, also consider FHA, VA, USDA, or DPA options to buy with less than 20% down.
Purchase Options for 97% LTV/CLTV/HCLTV
| HomeReady | 97% LTV Standard | |
|---|---|---|
| First-time home buyer | Not required | At least one borrower must be a first-time homebuyer. |
| Income limits | 80% of AMI in all census tracts. HomeReady income limits are integrated in DU or can be found using the Income Eligibility Lookup tool. | No limits |
| MI coverage | 25% MI coverage for LTV ratios of 90.01–97%; standard MI coverage for LTV ratios of 90% or less. Minimum MI coverage may be used subject to LLPA for Minimum MI. | Standard MI coverage; or Minimum MI coverage may be used subject to LLPA for Minimum MI |
| Homeownership education and housing counseling |
If all occupying borrowers are first-time homebuyers then at least one borrower must complete homebuyer education, regardless of LTV. For details see Homeownership Education and Housing counseling FAQs. |
For purchase transactions with LTV, CLTV, or HCLTV > 95%, if all occupying borrowers are first-time homebuyers, then at least one borrower must complete homeownership education, regardless of the product chosen. For details see Homeownership Education and Housing counseling FAQs |
| Pricing | LLPAs are waived for all HomeReady loans*. | Standard risk-based LLPAs* (based on loan risk characteristics) |
*Loan Level Price Adjustments (LLPAs) are waived for all HomeReady loans, as well as first-time homebuyers that meet certain income requirements and Duty to Serve loans. See the LLPA Matrix and Duty to Serve eligibility requirements for details.
The 3% Down Conventional Loan No One Is Talking About
FAQ
Can I put 3% down with a conventional loan?
What is the lowest down payment for a conventional loan?
Does Fannie Mae have a 3% down program?
What is the difference between a conventional loan 3 and 5?
What is a 3% down 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 home loan might be perfect if you:
What is a 3% down payment on a conventional loan?
With Fannie Mae’s HomeReady and Freddie Mac’s Home Possible, a 3% down payment — or what lenders refer to as 97% loan-to-value, or LTV — is available on so-called conventional loans. Conventional loans are the loan products most often issued by lenders.
Do you need a down payment for a conventional mortgage?
All conventional mortgage loans require a down payment. But the amount you need can vary widely. Home buyers can make a conventional down payment anywhere between 3% and 20% (or more) depending on the lender, the loan program, and the price and location of the home.
Who can qualify for a 3% down conventional loan?
Not all home buyers can qualify for a 3% down conventional loan. Fortunately, other low-down-payment options are available. Anyone can apply for a conventional loan with 5% down; you don’t need to be a first-time home buyer or have a low income to qualify. However, you must purchase a primary residence.