Conventional 97 (3% Down)

What is the Conventional 97 Loan Program?

In an effort to increase the amount of mortgages offered in the U.S. Fannie Mae and Freddie Mac wanted a loan program that would could compete with FHA loans. Fannie and Freddie are Government spooned enterprises that are the main buyer of mortgages in the country.

The number one hurdle first time home buyers have is coming up with the down payment. With all the benefits of conventional loans and now requiring just a 3% down payment, the conventional 97 loan is perfect for first-time buyers.

Now conventional financing is a very viable option to buyers with less than a 5% down payment of the purchase price allowing them to compete with FHA loans, and other Government loans.

Conventional 97 Guidelines

Many mortgage lenders offer the 3% down mortgage. The criteria to qualify is similar to a regular conventional loan. Many borrowers may qualify for this program.

  • Debt-to-income of 41% or lower
  • $424,100 Maximum loan limit
  • Minimum credit score requirement of 620
  • One of the borrowers must not have owned a house in the past 36 months
  • Single Family Homes, PUD, condo, town homes, CO-OP are eligible
  • Owner-Occupied buyers only, no real estate investors
  • Maximum LTV ratio of 97 percent

Comparing Conventional Loans vs FHA Loans

For those who think their only option is an FHA loan with less than a 5% downpayment, the conventional 97 loan is another great option because of the low 3% down requirement.

Because of the low down payment requirement this mortgage program is very attractive to first-time homebuyers. Plus, the Fannie Mae Loan Level Price Adjustment (LLPA) chart shows a borrower with a FICO score of just 620 can qualify.

So. What are the key benefits of each loan program?

FHA Pros

  • High debt-to-income ratio (as high as 51% – Conventional 3% cut off is approximately 42%)
  • A friend or family member can gift the down payment to the borrower.
  • Sellers can contribute up to 6% towards the buyers closing costs. Conventional 97 allows the seller to pay 3%.
  • Student loans that are in deferment will not be counted against a borrowers DTI ratio.
  • FHA mortgage loans have lower interest rates.
  • Higher mortgage insurance premium
  • Flexible qualifying guidelines.
  • Minimum credit score required is 580.
  • FHA loans are assumable, conventional loans are not.

Conventional 97 Pros

  • No front-end private mortgage insurance (PMI) is required.
  • PMI cancels automatically when the loan-to-value ratio reaches 78%, FHA MIP is required for the life of the loan.
  • Minimum down payment of just 3%, which is .5% lower than an FHA loan.
  • A friend or family member can gift the down payment to the borrower.
  • Higher maximum loan amounts
  • 620 FICO score requirement

Conventional 97 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.