Down Payment Assistance Programs: 3 Percent Down Conventional Loans

One of the more common loans on the market is the 3 percent down conventional loan (also known as a Conventional 97 loan). The 3% down loan is attractive to those without large down payments and applies to the majority of borrowers due to not needing to be part of a specific income bracket or region.

While HomeReady (from Fannie Mae) and Home Possible (from Freddie Mac) loans cater to low-income home buyers, a conventional 3% down loan is an option for any borrower. With this loan program, anyone who qualifies for a conventional loan can put down just 3% payment, financing the remaining 97% of the purchase price.

Unlike FHA, VA, or USDA loans which are government-backed, the 3 percent down loan is a conventional loan that works like any other conventional mortgage. Rather, lenders like Fannie and Freddie invest in the loans, but they don’t guarantee them in the same way as the government. 

Qualification Criteria

Qualifying for a 3% down conventional loan, borrowers will need decent credit, a low debt-to-income proportion, and proof that the loan can be paid moving forward. As a result of putting a smaller amount down at the time of purchase, monthly payments will be higher and include private mortgage insurance (PMI) until borrowers owe less than 80% of the home’s value.

Having a good credit report, featuring a score of at least 620— though for better chances, a minimum of 680 is a good plan— and good credit history. Your credit history can tell lenders if you make payments on time. Your interest rate will be determined by your credit score, which will have an impact on your mortgage payment.

Having a debt-to-income ratio lower than 43%— a quota comparing monthly debts (found on your credit report) to gross (pre-tax) monthly income. Outstanding debts can tell lenders you may be at a higher risk of defaulting, affecting your chances. Something to note is that this figure includes existing debts as well as the new mortgage payment, which itself includes principal, interest, monthly real estate taxes, monthly homeowner’s insurance, mortgage insurance, and HOA dues (where applicable).

A good employment history of at least two years of stability as well as a steady income is what most lenders look for as proof that mortgage payments will continue to be paid in a timely manner. While staying with the same employer will give lenders the necessary reassurance they need, changing jobs but remaining within the same industry may be acceptable, but varies from lender to lender.

Lenders like Fannie and Freddie must stay within conforming loan limits— currently $548,250 in 2021. Loans for larger amounts are known as jumbo loans, which will have different eligibility requirements.

Most first-time buyers will need to complete a home buyer education course before obtaining approval for the 3 percent down conventional loan program. This will ensure borrowers understand the undertaking that purchasing a home entails before getting too far into the process.

No recent bankruptcies or foreclosures are necessary. While it’s not necessarily a dealbreaker, there must be four years following a Chapter 7 bankruptcy and seven years post-foreclosure. And finally, this must be a primary residence for the borrower.

The Different Types of 3 Percent Down Conventional Loans

HomeReady Loan: Backed by Fannie Mae, this option is for low-income borrowers, intergenerational families, and buyers in some low-income areas. It’s available to first-time and subsequent buyers.

Home Possible Loan: This loan is financed by Freddie Mac and is similar to the HomeReady loan.

97% LTV Standard Loan: Available to most borrowers meeting credit score requirements, this is a popular choice for those not looking to tie up all liquid assets for a down payment. Others choose it when there aren’t enough liquid assets for a large down payment, but don’t want to wait to save up for a home.

In Summary

The pros of a 3% down conventional loan is that anyone can qualify so long as they meet credit score minimums with no income requirements. Liquid reserves can be saved for emergencies, home expenses, or improvements, as it doesn’t all have to be used as a down payment. PMI is only needed until more than 20% of the home’s value is paid off. And finally, the property requirements are a little looser than government-backed loan options.

The cons of this loan choice is needing solid credit to meet requirements. The loan must be used on a primary residence. And due to putting less down up-front, monthly mortgage payments will be higher because more money is being borrowed.

To determine if this loan type is the right one for you, contact your local licensed Geneva loan officer today.

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