A guide to 3% down mortgages
You may still be able to buy a home with a small down payment
While it’s often said you need a 20% down payment to buy a home, that’s not always the case. Many mortgage programs allow you to buy a home with a down payment as low as 3%. This opens doors for more people to achieve their homeownership dream without the burden of saving up a substantial amount.
These programs can be an excellent option for first-time homebuyers or those with small savings. They can empower individuals with limited financial resources to become homeowners, fostering a more inclusive and diverse housing market.
Key insights
- Fannie Mae’s conventional 97 and HomeReady mortgage programs offer financing with down payments as low as 3%, plus you can use down payment assistance.
- Freddie Mac’s conventional HomePossible and HomeOne programs also allow people to put only 3% down on a home purchase.
- In addition, the FHA, USDA and VA all offer government-backed loans featuring affordable down payments as low as 0% to 3.5%.
Conventional 97 loan
A standard conventional 97 loan is offered by Fannie Mae and is intended to make it easier for borrowers to qualify for financing with as little as 3% down. To use the program, at least one of the borrowers must be a first-time homebuyer. Unlike many other low-down-payment loans, you don’t need a low income to be eligible for this program.
Conventional 97 loans work similarly to standard conventional loans. The interest rate you’ll pay is fixed, as it would be if you made a larger down payment. You’ll also be required to pay for mortgage insurance. However, there are a few extra criteria.
In situations where all the borrowers who will occupy the home are first-time homebuyers, at least one of the borrowers must complete homeownership education. This can be done by completing Fannie Mae’s HomeView training. This training is meant to help ensure these borrowers are prepared to manage their new mortgage.
This low-down-payment program is available for fixed-rate mortgages with repayment terms of up to 30 years. As an added benefit, if you’re required to have mortgage reserves (aka, cash reserves) to qualify for the loan, these reserves can be gifted to you. You can also get help from third parties to cover your down payment and closing costs.
You can apply for this loan with mortgage lenders that offer conventional loans using the same process as any other loan. This includes submitting an application and providing necessary documents (e.g., tax returns, income verification and bank statements) to your lender.
Pros
- Down payment assistance is allowed.
- Mortgage reserve funds can be gifted.
- You don’t need to be low-income to qualify.
Cons
- Homeownership education is required.
- At least one borrower must be a first-time homebuyer.
- Mortgage insurance is required.
HomeReady
The HomeReady mortgage is another loan offered by Fannie Mae that allows borrowers to put as little as 3% down. Unlike Fannie Mae’s conventional 97 program, the HomeReady program isn’t available only to first-time homebuyers. However, if all borrowers occupying the property are first-time homebuyers, at least one must complete homeownership education.
For you to be eligible for a HomeReady mortgage, your income cannot exceed 80% of the area median income (AMI) where you live. You can use Fannie Mae’s AMI Lookup Tool to see the income requirements for your area.
Additionally, risk-based pricing adjustments used on standard conventional loans don’t apply to this type of loan. Lenders typically use these pricing adjustments to apply higher rates to riskier loans (e.g., when the loan-to-value ratio is higher). This means you may be able to get a better rate on a HomeReady loan than you could otherwise.
Besides these benefits, mortgage insurance requirements are reduced for loans with loan-to-value (LTV) ratios of 90.01% to 97%. (This equates to equity of 3% to less than 10%.) In contrast, there’s no reduction to the mortgage insurance requirements for conventional 97 loans. So, a HomeReady loan may cost less if you’re eligible for it.
You can apply for this loan with mortgage lenders offering conventional Fannie Mae loans using the same application process as you would for any other mortgage.
Pros
- Mortgage insurance coverage is reduced for loans with low down payments (3% to less than 10%).
- You may receive better pricing with this loan than with a standard 3% down conventional loan.
Cons
- You must meet low-income eligibility criteria.
- Homeownership education is required if all occupying borrowers are first-time homebuyers.
Home Possible
The Home Possible is a conventional loan from Freddie Mac that offers low-income borrowers a 3% down-payment mortgage. Freddie Mac has a tool you can use to see if you meet its low-income eligibility requirements based on the home's location.
Unlike some 3% down-payment loans, you don’t need to be a first-time homebuyer to be eligible for this loan. Plus, even if you already have a loan on another residential property, you may be able to get a Home Possible loan.
Additionally, down payments for this loan don’t need to come from cash you’ve saved. You can also use employer-assistance plans, gifts from family, other loans and even sweat equity from improvements you make to the home before the loan closes.
But remember that if your down payment is less than 20%, you’ll need to pay for mortgage insurance with this type of loan. Plus, if all borrowers are first-time homebuyers or you’ve qualified for the loan using nontraditional credit references, you must complete homeownership education before getting the loan.
You can apply for this type of loan with lenders offering conventional Freddie Mac loans just like you would for any other type of mortgage.
Pros
- You don’t have to be a first-time homebuyer to qualify.
- Your down payment can come from gifts, help from third parties, loans and even sweat equity.
- You can get this type of loan even if you have a mortgage on another residential property.
Cons
- Only low-income borrowers are eligible.
- Mortgage insurance is required for down payments of less than 20%.
- Homeownership education is required for some borrowers.
HomeOne
The HomeOne mortgage is another conventional Freddie Mac loan that offers a low 3% down payment to qualified first-time homebuyers. You don’t need to meet any income requirements to qualify for this loan. It’s open to any borrowers needing a low-down-payment mortgage option.
However, to be eligible, you can’t have owned a residential home during the three years preceding the purchase of the home you’re financing. All borrowers must also plan to live in the financed home as their primary residence.
Like many other 3% down-payment loans, if you and your co-borrowers are first-time homebuyers, you’ll need to complete homeownership education before you get the loan. Plus, you must pay mortgage insurance if your down payment or equity is less than 20%.
If you don’t have enough cash for the down payment, you may be able to use an Affordable Second loan to help fund the down payment and closing costs. This is a loan you get in addition to your mortgage from eligible credit unions or community development financial institutions (CDFIs).
You can apply for a HomeOne mortgage through lenders that offer conventional Freddie Mac loans just like you would for any other conventional loan.
Pros
- You don’t need to have a low income to use it.
- You can use this loan program even if you’ve owned a home in the past.
- Affordable Second loans may be used for the down payment and closing costs.
Cons
- All borrowers must live in the home as their primary residence.
- You can’t have owned a residential property in the previous three years to be eligible for this loan.
- Mortgage insurance is required for low down payments.
Other options for a low down payment
In addition to low-down-payment conventional loans, you might consider getting a government-backed loan. Some of the most common examples of these loans include FHA, USDA and VA loans.
- FHA loans
- An FHA loan is a mortgage guaranteed by the Federal Housing Administration (FHA) of the U.S. Department of Housing and Urban Development (HUD). When you get an FHA loan, the government promises your lender to repay a portion of your loan if you don’t do so. As such, lenders can offer better terms than you could get without the guarantee.
Current homeowners and prospective buyers of residential properties are eligible for FHA loans. You can use FHA loans for various purposes, such as buying a home, refinancing a loan or renovating your home.
FHA loans feature down payments as low as 3.5%. Since a government guarantee backs the loan, qualifying for this type of loan is easier than a conventional loan. You may be able to qualify with a credit score as low as 580 with a 3.5% down payment. In contrast, you may need a credit score of at least 620 to qualify for a conventional loan.
» COMPARE: Best FHA loan lenders
- USDA loans
- The U.S. Department of Agriculture (USDA) offers two affordable mortgage programs that can be used to finance residential homes for those living in eligible rural areas. It directly issues loans to low- or very-low-income borrowers through its Rural Development division and offers guaranteed loans to those with moderate income through approved lenders.
You can see if you meet the USDA’s income requirements and if your area is considered rural by using the USDA’s online eligibility tool. With USDA loans, you typically don’t need a down payment. This can be an excellent option for those who can’t afford to make a standard down payment and live in a rural area.
» COMPARE: Best USDA lenders
- VA loans
- A VA loan is a mortgage available to eligible military service members and veterans who meet the VA’s minimum active-duty requirements. You can use a VA loan to buy a home or refinance an existing mortgage.
If you’re eligible for a VA loan, you may not need to make a down payment. This makes VA loans an exceptionally affordable option.
» COMPARE: Best VA loan lenders
Should you put 3% down?
Ultimately, "The amount of money you should spend on a down payment depends on your situation,” said Ashley Moore, community lending manager with Chase Home Lending. Some factors to consider when determining your down payment size include your cash reserves, household income and debt-to-income (DTI) ratio.
If the only thing deterring you from buying a home is not having a big enough down payment, you shouldn’t let that stop you. Moore explained that this is especially true if you have sufficient household income — one of the approval criteria you’ll need to meet.
When qualifying you for a mortgage, lenders consider the size of the down payment, your job history and your DTI ratio. Most lenders want a DTI ratio of no more than 36% to 43%, but they may allow DTIs as high as 50%. If you can easily afford the mortgage payments with a smaller down payment, making a low down payment shouldn’t hold you back.
That said, you may only want to make a small down payment if doing so will not deplete your savings, Moore said. Not only is it wise to have savings in case of an emergency, but many lenders require you to have savings you can access if needed (otherwise known as cash reserves or mortgage reserves).
As you evaluate these factors, remember that you’ll pay more interest over time if you make a smaller down payment. For example, consider these mortgage costs for a home costing $300,000 with a 30-year term and a fixed interest rate of 7% with three different down payments:
| 3% down payment | 10% down payment | 20% down payment | |
|---|---|---|---|
| Cost of the home | $300,000 | $300,000 | $300,000 |
| Down payment | $9,000 | $30,000 | $60,000 |
| Mortgage amount | $291,000 | $270,000 | $240,000 |
| Monthly P&I payment | $1,936 | $1,796 | $1,597 |
| Total interest cost | $405,971 | $376,674 | $334,821 |
As you can see, your monthly principal and interest (P&I) payment would be $1,936 with a 3% down payment versus $1,597 with a 20% down payment. Plus, you would pay $405,971 in total interest costs over the 30-year mortgage term with a 3% down payment versus only $334,821 in total interest costs with a 20% down payment.
FAQ
What credit score is needed for a 3% down mortgage?
A credit score of around 620 or higher is generally needed for a 3% down mortgage. However, specific requirements may vary depending on the lender and other factors. For example, your lender may require a better credit score if you have a high DTI ratio or low mortgage reserves.
Can you buy a vacation home with 3% down?
No, it's generally not possible to buy a vacation home with only 3% down. Most lenders require higher down payments for second homes or investment properties. A down payment of 10% is commonly needed for these types of properties.
Can you get a jumbo loan with 3% down?
You’re unlikely to get a jumbo loan with only a 3% down payment. Some lenders may offer jumbo loans with down payments as low as 10%. However, jumbo loans typically require larger down payments, often around 20% or more.
Are there mortgages with 0% down?
Yes, some lenders offer mortgages with 0% down payment options, particularly for certain government-backed loan programs or first-time-homebuyer initiatives. For example, you may be able to get a VA loan with no down payment. However, eligibility criteria and terms may vary.
Bottom line
Various conventional mortgage programs offer 3% down-payment options, including Fannie Mae's Conventional 97 and HomeReady programs and Freddie Mac's HomePossible and HomeOne programs. Government-backed loans also offer affordable down payment options.
Whether you should consider making a 3% down payment depends on your individual circumstances, such as your cash reserves, household income and DTI ratio. Before making a decision, remember that while a smaller down payment may be easier to afford, it means higher total interest costs over the life of the loan.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Fannie Mae, "97% Loan to Value Options." Accessed July 21, 2023.
- Fannie Mae, "FAQs: 97% LTV Options." Accessed July 21, 2023.
- Fannie Mae, "HomeReady Mortgage." Accessed July 21, 2023.
- Freddie Mac, "Affordable Seconds." Accessed July 21, 2023.
- FreddieMac, "HomeOne." Accessed July 21, 2023.
- Freddie Mac, "HomeOne Mortgage." Accessed July 21, 2023.
- Freddie Mac, "Home Possible Mortgage FAQ." Accessed July 21, 2023.
- Freddie Mac, "Make a Down Payment with Your Skills Instead of Cash." Accessed July 21, 2023.
- Freddie Mac, "Your Guide to the Home Possible Mortgage." Accessed July 21, 2023.
- U.S. Department of Agriculture - Rural Development, "Single Family Housing Direct Home Loans." Accessed July 21, 2023.
- U.S. Department of Agriculture - Rural Development, "Single Family Housing Guaranteed Loan Program." Accessed July 21, 2023.
- U.S. Department of Agriculture - Rural Development, “Single Family Housing Programs.” Accessed July 21, 2023.
- U.S. Department of Housing and Urban Development, "FHA Single-Family Origination Trends Report." Accessed July 21, 2023.
- U.S. Department of Housing and Urban Development - Federal Housing Administration, “FHA Single Family Housing Policy Library.” Accessed July 21, 2023.
- U.S. Department of Housing and Urban Development, "Single Family Mortgage Programs." Accessed July 21, 2023.
- U.S. Department of Veterans Affairs, "VA Funding Fee and Loan Closing Costs." Accessed July 21, 2023.
- U.S. Department of Veterans Affairs, "VA Housing Assistance." Accessed July 21, 2023.
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