The largest barrier to homeownership is the down payment. Borrowers that cannot come up with 20% down assume they can’t buy a home. Fannie Mae has come up with an answer to this problem by offering low down payment options. Yes, you can get a conventional loan and make a down payment that is lower than the FHA requires. The trick is that you have to prove that you are creditworthy and that the down payment is the only stumbling block keeping you from owning a home.
The Conventional 97 program is a standard conventional loan program with loan down payment requirements. You only need to put 3% down on the home. On a $200,000 home, this means $6,000. Compare that to the standard 20% down payment at $40,000 and you can see the savings.
In order to qualify for this program, at least one borrower must be a first-time homebuyer. A first-time homebuyer must meet the following requirements:
- You must be buying the property to live in it
- You must not have owned a principal residence within the last 3 years
- Recently divorced or separated parents that owned a home with a spouse but now has no homeownership may also qualify
The good news is that the 3% down payment doesn’t have to come from your own funds. You are able to accept gift funds, grants, or Community Second mortgage for the down payment.
The property you purchase with the Conventional 97 program must be a one-unit property. This does include condominiums, co-ops, and townhomes. The only types of homes excluded from the program are manufactured homes.
You are eligible for a term of up to 30 years on the Conventional 97 program. But, you can only get a fixed rate loan; ARM loans are not eligible for this program. This helps keep the default rate of this mortgage program down as ARM loans are riskier for lenders since the rate can adjust, making the payment unaffordable.
Of course, since you put less than 20% down on the home, you will have to pay PMI or Private Mortgage Insurance. This is standard insurance coverage that you would pay on a Fannie Mae loan no matter how much you put down, unless it was more than 20%. Luckily, you can cancel this insurance once you owe less than 20% of the home’s value.
With the Conventional 97 program, the higher your credit score, the better your pricing. This pertains to both the interest rate as well as the amount of PMI you pay on the loan. The higher your credit score, the lower risk you pose to the lender, which allows them to give you better terms.
Fannie Mae HomeReady Loan
Another conventional low down payment option is the HomeReady Loan. The main difference with this program is you don’t have to be a first-time homebuyer. Anyone that qualifies for the program can use it. But there’s a catch – you can only make a certain amount of money in order to qualify.
The HomeReady program was developed to help stimulate the housing industry in low-income census tracts. If you move to a low-income census tract area, there aren’t any limits to the amount of money you can make to qualify for the loan. If you move to any other area, though, you can only make 100% of the Area Median Income in order to use the program. You can use this tool to see if you are eligible.
Just as with the Conventional 97 program, you can accept gift funds, grants, or Community Second mortgages for the down payment. There is not a minimum contribution you must make, which means you can come to the closing with no funds of your own and still get the loan.
You will also pay mortgage insurance for the HomeReady program, but it is often a lesser amount than you would pay with any other Fannie Mae program. Just as is the case with any other conventional loan, you can cancel the mortgage insurance once you owe less than 80% of the home’s value.
Just as with any Fannie Mae program, the higher your credit score, the better the pricing on the loan. This loan program does allow credit scores as low as 620, but many lenders require a higher score just to keep the risk level down.
Freddie Mac HomePossible
The final low down payment program for conventional loans is the Freddie Mac HomePossible loan. This program is also for low to moderate-income families that don’t have a large down payment. The HomePossible program has two options – the 95% LTV and the 97% LTV.
The 95% LTV program is for one to four unit properties that include condominiums, townhomes, and manufactured homes. You can receive 100% of the down payment from a gift or grant and you can secure a fixed rate or ARM loan. Freddie Mac allows both 15 and 30-year terms as well as 5, 7, or 10-year ARMS.
Freddie Mac allows the use of traditional or non-traditional credit and has some income flexibility. In low-cost areas, there are no restrictions to the income. In high-cost areas, it’s on a case-by-case basis.
The 97% LTV program is only for one-unit properties. This includes condominiums and townhomes, but it excludes manufactured homes. You may receive 100% of the down payment from sources other than yourself including gifts, grants, and piggyback loans. Just as with the other conventional loans, you will pay PMI until you owe less than 80% of the home’s value.
With a 97% LTV, you may only secure a 30-year fixed rate loan and the home must be your primary residence. As far as income is concerned, it’s up to the lender and Freddie Mac. If you live in an area that isn’t low-cost, the lender has to decide if you qualify if your income is higher than the Average Median Income for the area.
The low down payment conventional programs give you access to the best terms on the market without the need for a 20% down payment. Explore all of your options when looking for a home, especially if you don’t have the high down payment many programs require. Pay close attention to the rate, closing costs, and cost of the mortgage insurance to help you make your decision.