Buying a home with just 3% down recently became reality for conventional loans. This down payment requirement is even lower than what is required of FHA loans. If you have the qualifying factors for a conventional loan, this can be great news. You can avoid the FHA mortgage insurance that lasts for the life of the loan by taking advantage of the flexible conventional loan program.
The Benefits of the 3% Down Payment Program
As you can predict, the lower down payment requirements for the conventional loan are the largest benefit. Knowing that you can get a home with just 3% down can make homeownership much easier. Even though a 2% difference doesn’t sound like a lot, when you are talking about thousands of dollars, it is a big difference.
For example, let’s say you wanted to buy a $300,000 home. If you needed a 5% down payment, you would have to come up with $15,000. If you only needed a 3% down payment, you would only need $9,000. That’s a difference of $6,000.
Another benefit that you’ll realize with the Conventional 97 program is the lack of upfront mortgage insurance. While you will pay annual mortgage insurance, as you would with an FHA loan, you won’t have to pay the upfront mortgage insurance, which is 1.75% of your loan amount. In addition, you’ll be able to eliminate your mortgage insurance as soon as you owe less than 80% of your home’s value. With an FHA loan, you are unable to eliminate the mortgage insurance – you pay it for the life of the loan.
Qualifying for the Conventional 97 Program
Just like any loan, you have to qualify for the Conventional 97 Program. This includes:
- A credit score of at least 620 (typically lenders require higher scores, but 620 is the lowest that the Fannie Mae automated software will allow)
- You must make a 3% down payment, but there isn’t a minimum amount of funds that you must put down. You can obtain gift funds or a second mortgage for the down payment.
- You must be a first-time homebuyer. The good news is that even if you owned a home before, but it was at least 3 years ago, you qualify as a first-time homebuyer.
- You must use the funds to purchase a primary residence. You cannot use the funds to buy an investment property or vacation home.
- You can typically have up to a 43% total debt ratio to qualify for the loan, but each individual has different circumstances.
- You don’t have to be a low-income borrower. There aren’t any income limitations for the Conventional 97 program.
How it Differs From the FHA Loan
You probably wonder what’s different with the Conventional 97 program and the FHA program. Both require low down payments, but the FHA loan requires a 3.5% down payment versus a 3% down payment. Other differences include:
- FHA loans require just a 580 credit score
- FHA loans allow a 31/41 debt ratio maximum
- FHA loans charge 1.75% of the loan amount upfront at the closing
- FHA loans charge 0.85% of the outstanding loan amount each year (charged monthly) for the life of the loan
- You don’t have to be a first-time homebuyer to qualify for an FHA loan
- You do have to live in the property as your primary residence
As you can see, there are many similarities, except for the credit score requirement and the time that you must pay the mortgage insurance. If you are a good credit borrower, you may be better off with the Conventional 97 program because you only pay mortgage insurance until you owe less than 80% of the home’s value. If you don’t qualify for the Conventional 97 because you don’t have a high enough credit score, you could then try the FHA loan, but if you qualify for it, you will likely spend less over the life of the loan on mortgage insurance.