What is a conventional 97 home loan?

With just 3% down, you could be on your way to homeownership

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If you’re in the market for a home but don’t have a lot of cash for a down payment, you can still get a mortgage. Conventional 97 home loans allow you to purchase a home with just 3% down and offer competitive interest rates for qualified borrowers.

There are several “low down payment” home loans available, so we’ll review the details of how conventional 97 home loans work, what you need to do to be eligible for this type of loan and cover a few alternatives that also allow smaller down payments.


Key insights

Conventional 97 loans allow low-income and first-time homebuyers to purchase a home with as little as 3% down.

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Conventional 97 loans are available from Fannie Mae and Freddie Mac.

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Some conventional 97 loans have income limits.

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You must purchase a personal residence with a conventional 97 loan, though some programs allow for the purchase of multi-unit properties.

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How conventional 97 home loans work

A conventional 97 home loan is a loan program backed by Fannie Mae and Freddie Mac that allows certain qualified borrowers to obtain a mortgage with only a 3% down payment. With a 3% down payment, you are borrowing 97% of the purchase price of the home – hence the name.

These home loans are designed for first-time homebuyers to increase affordability and help borrowers who can’t save up the traditional 20% down payment for a mortgage. For example, if you want to purchase a home for $300,000, a traditional 20% down payment would be $60,000. If you add in closing costs, you’d need to save even more to buy a home. But with a conventional 97 loan, you only need to spend $9,000 on your home loan (plus closing costs). This means you don’t need to save that additional $50,000 to buy a home.

Conventional 97 loans come with mortgage insurance, but some options drop the insurance once you reach a certain loan-to-value (such as 80% LTV).

Types of conventional 97 home loans

There are several types of loans under Freddie Mac and Fannie Mae that fall under the conventional 97 home loan umbrella:

  • Fannie Mae 97% LTV Standard. This conventional loan offers a 3% down payment for first-time homebuyers (or those who haven’t owned a home within the last three years). “If the borrower does not have funds for the down payment, they can utilize any down payment assistance programs in conjunction with this loan,” said Reed Letson, owner of Elevation Mortgage. “You should choose this loan product when you have good credit and your income exceeds 80% of area median income (AMI).”
  • Fannie Mae HomeReady. This loan program offers a 3% down payment for low-income homebuyers whose income is at 80% of the area median income or less. This loan has a minimum credit score requirement of 620 and comes with standard or minimum mortgage insurance.
  • Freddie Mac HomeOne®. This home loan program offers a 3% down payment option for borrowers purchasing a single-family home. There are no income limits to be eligible. It does come with standard mortgage insurance of 35% coverage if your LTV is at 95% or higher.
  • Freddie Mac Home Possible®. Similar to the Fannie Mae HomeReady program, this home loan aims at low-income homebuyers whose income is 80% or less of the area median income. It offers a 3% down payment and comes with mortgage insurance, though the insurance can be dropped when the LTV reaches 80% or less. Down payment funds can come from a variety of sources, including family, employer assistance housing programs or secondary financing.

Note that for each of these loans, if all borrowers on the loan are first-time homebuyers, at least one borrower must complete a homebuyer education program.

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Eligibility criteria for a conventional 97 home loan

To be eligible for a conventional 97 mortgage, there are some specific criteria you must meet (depending on the loan type):

Credit score. With most conventional 97 home loan programs, you’ll need a credit score of at least 620 to qualify. Some programs don’t state a minimum score required, but in general, the higher your credit score, the better your interest rate will be.

Debt-to-income ratio (DTI). For most home loans you’ll need to have a debt-to-income ratio of 43% or below, though conventional 97 loans don’t state a maximum DTI. You’ll need to check with your lender on specific DTI requirements for each loan type.

Down payment. For conventional 97 loans, the down payment minimum is 3% of the home’s purchase price. In some cases, the down payment may be higher depending on the type of home being purchased. Borrowers may pay higher mortgage insurance rates with lower down payments.

Types of homes. For most conventional 97 loans, the home being purchased must be a single-family home or one-unit property. The Freddie Mac Home Possible program allows loans on up to four-unit properties.

Homebuyer education. For all conventional 97 programs, at least one borrower is required to take a homebuyer education program to be eligible for the loan.

Income limits. Some conforming 97 loans have income limits, such as earning less than 80% of the area median income (AMI). If you earn too much, you may not qualify for one of these loans. The HomeOne program from Freddie Mac does not have income limits.

Pros and cons of conventional 97 home loans

Conventional 97 mortgages offer a low-down-payment home loan option for first-time homebuyers and those who may not qualify for a traditional mortgage. But these may come with mortgage insurance and some have additional income requirements.

Here are the pros and cons of conventional 97 mortgages:

Pros

  • As little as 3% down payment required
  • May qualify for down payment assistance
  • Low credit score requirement (620 minimum)

Cons

  • Most loans come with required mortgage insurance
  • Most have income limits
  • Not all property types eligible

» MORE: How much house can I afford?

How to apply for a conventional 97 home loan

Applying for a conventional 97 mortgage is a similar process as applying for any other type of mortgage.

  • Find a lender. You’ll first need to find a lender that offers Fannie Mae or Freddie Mac conventional 97 home loans. You’ll want to ask your lender about their low-down-payment programs to see if they offer one of these loans.
  • Choose a loan type. Once you find a lender to work with, you’ll want to find a loan type that fits your financial goals. If you have a lower credit score or lower income, choosing a conventional 97 loan with limits may help you qualify. Pick a loan type and then apply.
  • Submit an application. To submit your loan application, you’ll need to provide your personal and financial information, including name, current address, phone number, social security number, bank statements, proof of income and any other required documents. Your lender will also run a credit check to verify your credit history and score.
  • Complete required paperwork. To complete the application, you may need to provide additional documentation, including proof of funds for your down payment, or a list of debts with minimum payments. Complete all required paperwork to finish the loan application.
  • Purchase a home. Once you’re pre-approved for a conventional 97 home loan, you can now go house shopping. Once you make an offer and purchase a home, the funds will be released to the seller, and you’ll now own a home.
  • Make payments. Once you’ve closed on your home, set up payments so you don’t miss any. Most lenders offer automatic payments that are usually due on the 1st of the month.

Alternatives to a conventional 97 home loan

If you don’t qualify for a conventional 97 loan, or simply want to explore other home loan options, here’s a list of alternatives with low down payments to consider:

FHA loans

FHA loans are guaranteed by the Federal Housing Administration, which is part of the Department of Housing and Urban Development (HUD). These loans offer down payments as low as 3.5% and are only for first-time homebuyers. If you have not owned a home within the last three years, you may be able to qualify. These loans also may be available to borrowers with credit scores as low as 580, making them more accessible than most conventional 97 mortgages.

USDA loans

The United States Department of Agriculture (USDA) offers two loan programs aimed at housing in more rural areas, with down payments as low as 0%. These loans help low-income borrowers in remote areas qualify for a home loan. You can find out if your area is eligible for a USDA loan using the online eligibility tool.

VA loans

The Department of Veterans Affairs (VA) offers a 0% down payment home loan program for eligible military service members and veterans who have met the minimum active-duty requirements. These loans are available for purchasing or refinancing a home.

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    FAQ

    Can you buy a home with no down payment?

    Several loan programs offer no down payment to purchase a home. The USDA and VA home loan programs offer down payments as low as 0% to purchase a personal residence, as long as you (and the property) meet the eligible criteria. You can also borrow a down payment with a secondary loan (or “piggyback loan”), or apply for a down payment assistance program to cover some (or all) of your down payment.

    How can you avoid paying PMI?

    To avoid paying for private mortgage insurance (PMI), most conventional loans require a down payment of at least 20%. If you already own a home and want to get rid of PMI, you may be able to request cancellation of the insurance after getting an appraisal on your home once you reach a loan-to-value (LTV) ratio of at least 80%. There are also loan programs that don’t charge PMI even on loans with low down payments.

    What are conforming loan limits?

    Conforming loan limits are set by Fannie Mae and Freddie Mac for the types of loans that they will purchase or guarantee. These limits are set by the Federal Housing Finance Agency (FHFA) and are adjusted every year. The current conforming loan limit for 2024 is $766,550, with loans up to $1,149,825 available in high-cost areas.

    Can you use a conventional 97 loan for an investment property?

    Conventional 97 loans are designed for personal residence properties only, but the Freddie Mac Home Possible program allows the purchase of one- to four-unit properties. This allows you to purchase a multi-unit property – as long as you are living in one of the units – and rent out the others. Just make sure you meet the income limit requirements before choosing this loan for a multi-unit property.

    Can you refinance a conventional 97 loan?

    Yes, you can refinance a conventional 97 loan to any loan type you wish. There are also refinance options within different conventional 97 programs, including the HomeOne program from Freddie Mac. But you cannot perform a “cash-out” refinance with a conventional 97 loan.

    Bottom line

    Conventional 97 loans offer low down payments to low-income and first-time homebuyers, designed to help make housing more accessible. There are several loan programs available for different types of properties and borrowers of different means. Whether you have a low credit score or a low-to-moderate income, a conventional 97 loan can help you purchase a home sooner.


    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:
    1. Fannie Mae, “97% Loan to Value Options.” Accessed March 4, 2024.
    2. Freddie Mac, “HomeOne®.” Accessed March 4, 2024.
    3. Freddie Mac, “Home Possible.” Accessed March 4, 2024.
    4. United States Department of Agriculture, “Rural Housing Services: Property Eligibility.” Accessed March 4, 2024.
    5. Federal Housing Finance Agency, “FHFA Announces Conforming Loan Limit Values for 2024.” Accessed March 4, 2024.
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