If you don’t have a large down payment, attractive loan options include 3% down conventional loans. These loans are for most borrowers – you don’t have to be in a specific income category or region.
Here’s everything you must know about these low down payment loans.
What Is A 3% Down Conventional Loan (Conventional 97 Loan)?
The Conventional 97 Loan is a 3% down payment option for any borrower. You don’t have to be a low-income home buyer either, as is necessary for HomeReady and Home Possible loans, two other low down payment options Fannie Mae and Freddie Mac offer.
With this program, any buyer who qualifies for a conventional loan can make just a 3% down payment, financing 97% of the purchase price.
How Does The Conventional 97 Loan Program Work?
The 3% down conventional loan works like any other conventional mortgage. A conventional loan is not government-backed. Fannie Mae and Freddie Mac invest in these loans, but they don’t guarantee them like the FHA, VA, and USDA guarantee their respective loans.
To qualify for a Conventional 97 loan, you’ll need decent credit, a low debt-to-income ratio, and proof that you can afford the loan moving forward. Because you make a small down payment, your monthly payment will be higher and will include private mortgage insurance until you owe less than 80% of the home’s value.
Qualifications And Requirements For A 3% Down Conventional Loan
Each lender has different qualifying requirements for the 3% down conventional loan, but on average, here’s how you might qualify.
Average Credit Score And Report
Your credit report and credit score are the first things mortgage lenders look at when determining if a borrower is eligible for the loan program. On average, lenders require a credit score of at least 620, but a credit score of 680 may give you an even better chance at loan approval.
Your credit history and credit score are both important factors. Your credit history shows lenders if you make your payments on time, especially any monthly mortgage payments. Lenders also consider your credit score, which determines if you qualify for the Conventional 97 program.
Your credit score also determines your interest rate, which affects your mortgage payment. Higher credit scores, especially those over 680, provide access to the best interest rates. If you’re approved with a lower credit score, you’ll likely pay a higher interest rate.
A Low Debt-To-Income Ratio
Ideally, all borrowers should have a debt-to-income ratio below 43%. Your debt-to-income ratio compares your monthly debts (on your credit report) compared to your gross monthly income (income before taxes).
Lenders use your DTI to determine if you can afford the loan. If your DTI is too high, it could mean you have too many debts outstanding. If you have too much money committed to your debts, you can be at a higher risk of default moving forward.
Keep in mind, your DTI includes all existing debts plus the new mortgage payment. The new mortgage payment includes principal, interest, monthly real estate taxes, monthly homeowner’s insurance, mortgage insurance, and HOA dues if applicable.
Good Employment History And Steady Income
Lenders typically want 2-year stable employment and income history. Employment stability shows you are lower risk because you don’t change jobs often. When you change jobs, your income typically changes, making it harder to afford your loan payment if your income falls or if you have significant gaps in employment.
A 2-year history provides lenders with enough reassurance that you’re a stable borrower. However, if you change jobs within the last 2 years but stay within the same industry, lenders may accept it as part of a 2-year stable history. When you change industries, they hesitate to approve your loan until you have a more stable history.
Doesn’t Exceed Conforming Loan Limits
Conventional loan lenders must abide by the conforming loan limits for Fannie Mae or Freddie Mac to invest in them. If they lend more than the annual limits, they’ll be stuck with the loan on their books, which reduces their liquidity to offer more loans and make more money.
In 2021, the conforming loan limit is $548,250. If you need a larger loan, you’d need a jumbo loan, which is a non-conforming loan and has different qualifying requirements.
An Education Course For Home Buyers
Most first-time home buyers must undergo a home buyer education course before taking on the Conventional 97 loan program. This ensures that home buyers understand what they’re getting into and the risk of borrowing 97% of the home’s value. The educational course is meant to help home buyers understand how mortgage loans work and ensure it’s the right financial choice for them.
No Recent Bankruptcies Or Foreclosures
It’s important that you don’t have any recent bankruptcy discharges or foreclosures on your credit report. If you had one or the other in the past, it might still allow you to qualify. However, 4 years must have passed after a Chapter 7 bankruptcy and 7 years after a foreclosure.
Must Be A Primary Residence
To use the 3% down conventional loan, the home you’re buying must be a primary residence. This means you must live in the home full-time. If it’s a second home, vacation home, or investment home, you can use traditional financing, but not the Conventional 97 loan program.
The Different Types Of 3% Down Conventional Loans
The Conventional 97 loan is one option of several 3% down conventional loan options. Knowing how to qualify for each is important to help you choose the right loan.
HomeReady Loan
The HomeReady Loan is another Fannie Mae option, but it’s for borrowers in a specific loan category. The HomeReady Loan is for low-income borrowers, intergenerational families, and some buyers in a low-income area. The loan program is available to first-time and subsequent home buyers.
Home Possible Loan
The Home Possible loan is Freddie Mac’s version of the low-income 3% down conventional loan. It too is available to low-income borrowers, intergenerational families, and buyers in some low-income regions.
97% LTV Standard Loan
The 97% LTV standard loan is for any borrower with qualifying credit scores. Some borrowers use it, so they don’t tie up all their liquid reserves in their down payment. Others use it because they don’t have enough money saved for a large down payment but now want to buy a home.
How To Get A Conventional 97 Loan
You don’t need to fit into a special category to get a Conventional 97 loan. The process is the same as any other loan.
You must be able to prove the following:
- You meet the minimum credit score requirements
- You can meet the down payment requirements
- You have enough income to cover your current debts plus the new mortgage
- You don’t have any recent bankruptcies or foreclosures
- You have stable income and employment
To get the loan, you must complete an application and provide your qualifying documentation, including your paystubs, W-2s, tax returns (if applicable), asset statements, proof of employment, and consent to pull your credit.
Pros And Cons Of Using A 3% Down Conventional Loan
Like any loan, there are pros and cons to the 3% down conventional loan. Here’s what you should consider.
Pros
- Anyone can qualify as long as they meet the credit score requirements. There aren’t any income requirements.
- You can save your liquid reserves for emergencies or other home expenses. You don’t have to put it all down on the home.
- You only have to pay private mortgage insurance until you owe less than 80% of the home’s value.
- It has less stringent property requirements than government-backed loans, like FHA loans.
Cons
- Your mortgage payment will be higher because you’re borrowing more money.
- You need good credit to qualify.
- You can only use the loan program on your primary residence.
3% Down Conventional Loan FAQs
Does the Conventional 97 loan require mortgage insurance?
Borrowers must pay private mortgage insurance (PMI) until they owe less than 80% of the home’s value. In other words, you need at least 20% home equity to cancel the insurance. If you follow your original amortization schedule, you should be on track to eliminate PMI quickly.
Are there income limits for Conventional 97 loans?
No, the Conventional 97 loan program doesn’t have income limits like the other conventional 3% down loan programs, such as the HomeReady or Home Possible loan program, both of which cater to low-income borrowers.
What are some alternatives to the Conventional 97 loan?
If you don’t meet the requirements for the Conventional 97 loan, you have other options, including the FHA loan, VA loan, and USDA loan. The FHA loan requires a 3.5% down payment, but you can use gift funds if available. VA and USDA loans don’t require a down payment but are only for military veterans or low-income rural home buyers, respectively. Rocket Mortgage® does not offer USDA loans.
The Bottom Line
A 3% down conventional loan can help borrowers who don’t have a large down payment or who don’t want to put all their money down on a home. If you’d like to learn more about low down payment options for conventional loans, check it out and see which loan option may be right for you.
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