HOW TO QUALIFY FOR A CONVENTIONAL 97 LOAN

Whether you earn a lower income or are a first-time homebuyer without equity from a previous home, it can be challenging to come up with enough cash for a significant down payment. The good news is that there are programs that limit your down-payment requirement to just 3% without requiring you to get a government-backed loan.

These so-called conventional 97 loan programs can help you get into the home you want more easily, but it’s important to understand their requirements and also to consider some alternatives before you apply.

Key Takeaways

• Conventional 97 loan programs allow you to put just 3% down on a home purchase.
• Eligibility requirements can vary, so it’s important to do your research before applying.
• Some government-backed loan programs offer up to 100% financing, which may be even better, if you qualify.
• Homebuyers may also consider down-payment assistance programs to achieve their goal.

What Is a Conventional 97 Loan?

A conventional 97 loan is a type of mortgage loan that requires a down payment of just 3%. The “97” in the name refers to the loan-to-value ratio of 97% that you’ll have when you close on the loan.(1)

The standard minimum requirement for a down payment on a conventional loan is 5%, and while 3% doesn’t seem much lower, it can make a huge difference.(2) For example, on a $250,000 loan, you’d need just $7,500 instead of $12,500.

There are a few types of conventional 97 loan programs that are available through Fannie Mae and Freddie Mac, including HomeReady loans, 97% LTV Standard loans, and Home Possible loans.

IMPORTANT: While each conventional 97 loan program has the same down-payment requirements, its eligibility criteria can vary.

Conventional 97 Loan Requirements

If you’re thinking about buying a home, but you don’t have a lot of cash for a down payment, a conventional 97 loan may be right for you. But depending on the program you choose, the requirements can differ. Here’s what you should know about each of the main programs available.

Credit Score

With all three loan programs, you need to have a credit score of 620 or higher.(3) This is standard for most conventional loans. That said, a higher credit score can help you achieve a lower interest rate on your new loan.

First-Time Homebuyer Status

Both the Fannie Mae HomeReady and Freddie Mac Home Possible loan programs are available to all types of mortgage borrowers.(4) If you want a 97% LTV Standard loan, though, you must be a first-time homebuyer.

TIP: To be clear, this doesn’t have to be your first home purchase for you to qualify as a first-time homebuyer. Speak with your loan officer to find out if you qualify based on your situation.

Income

The HomeReady and Home Possible loan programs are both designed specifically for low- to moderate-income borrowers. More specifically, your household income must be at or below 80% of the area median income, called AMI for short, based on where you live.

You can look up the AMI for your area by using Fannie Mae’s AMI lookup tool.

The 97% LTV Standard loan program does not have a maximum income limit, so anyone who meets the other criteria for the program may be approved.

Other Requirements

All three conventional 97 loan programs require that you complete a homebuyer education course, which you can find through Fannie Mae or Freddie Mac.

Also, Fannie Mae’s HomeReady and 97% LTV Standard loan programs are available only for one-unit principal residences, including eligible condos, co-ops, planned-unit developments, and manufactured homes through the MH Advantage program.

With Freddie Mac, you can get a Home Possible loan for one- to four-unit properties, condos, planned-unit developments, and certain manufactured homes.

Alternatives to Conventional 97 Loans

If you’re looking for a home loan with a low down-payment requirement, it’s important to consider all your options. Here are some alternatives to compare:

FHA Loans

A Federal Housing Administration (FHA) loan requires a minimum down payment of 3.5% and a credit score of 580 or higher.(5) However, if you can put 10% down, you can qualify with a credit score as low as 500.(6) There’s no maximum income requirement, so anyone can qualify if they meet all other criteria.

One thing to note is that FHA loans come with a mortgage insurance premium that you may not be able to get rid of, as you can with private mortgage insurance (PMI).

VA Loans

If you’re an eligible member of the military community, you don’t have to put any money down on a U.S. Department of Veterans Affairs (VA) loan. And this option is not reserved only for low- to moderate-income earners.

Keep in mind, though, that while the VA doesn’t list a minimum credit score requirement, most lenders will have one. The typical minimum is 640, but some lenders may be willing to accept a score as low as 580.(7) Also note that there’s an upfront funding fee that can range from 1.4% to 3.6%, depending on your down-payment amount and whether it’s your first VA loan.(8)

USDA Loans

The U.S. Department of Agriculture (USDA) loan program is primarily for low- to moderate-income homebuyers. Visit the USDA website to find out what the income limits are. You can also review the agency’s eligibility map to find out if the property you’re purchasing qualifies for a USDA loan.

USDA loans have a guarantee fee that consists of a 1% upfront fee and a 0.35% annual fee, which doesn’t go away like PMI.(9)

NOTE: Many lenders, as well as state and local organizations, offer home-buying assistance programs. Speak with your loan officer about down-payment assistance programs that may be available to you.

Frequently Asked Questions (FAQs)
How do I apply for a conventional 97 loan?

You can apply for a conventional 97 loan through a mortgage lender that offers them. The application process works the same way as other mortgage loan options.

Which lenders offer conventional 97 loans?

Not all lenders offer these types of loans, so it’s important to shop around and compare options. Consider speaking with a mortgage broker to get an idea about which lenders in your area offer conventional 97 loans.

How do I find out if a house qualifies for a conventional 97 loan?

Read through the requirements above to find out if the home you’re hoping to buy is eligible. If you’re still not sure, speak with a loan officer to learn more.

What are the restrictions for a conventional 97 loan?

Depending on the loan program, there may be restrictions based on creditworthiness, income, first-time homebuyer status, the property, and more. Make sure you read through eligibility requirements before you apply so you can avoid getting denied.

ARTICLE SOURCES

1. Fannie Mae. “97% Loan to Value Options.” Accessed July 7, 2021.
2. Rocket Loans. “Conventional Mortgages: Everything You Need To Know.” Accessed July 7, 2021.
3. Federal Deposit Insurance Corp. “Standard 97 Percent Loan-to-Value Mortgage.” Page 1. Accessed July 7, 2021.
4. Freddie Mac. “Home Possible Mortgage Features.” Accessed July 7, 2021.
5. U.S. Department of Housing and Urban Development. “Let FHA Loans Help You.” Accessed July 7, 2021.
6. Experian. “What Is a USDA Loan?” Accessed July 7, 2021.
7. Rocket Mortgage. “What Credit Score Do You Need To Buy a House?” Accessed July 7, 2021.
8. U.S. Department of Veterans Affairs. “VA Funding Fee and Loan Closing Costs.” Accessed July 7, 2021.
9. U.S. Department of Agriculture. “USDA Rural Development Reducing Fees Make Home Loans More Affordable.” Accessed July 7, 2021.