The average borrower wants a conventional mortgage when they purchase a home. Rates are lower and the terms seem friendlier. What if you don’t have the standard 20% down payment, though? What if you only have 3% to put down – are you out of luck? The good news is there is a Conventional 97 program. The bad news – you have to be a first-time homebuyer to qualify. However, Fannie Mae uses “first time” loosely. What it means is you cannot have owned a house within the last 3 years. If this describes you, read on for more details about the Fannie Mae 97% program.
What Does Conventional Mean?
First, let’s start with the term conventional. Why do people want these loans so badly? They are the “average” loan or the loan most borrowers take first. They are the loans that Fannie Mae and Freddie Mac set the guidelines for; however, they do not back the loans. Fannie Mae and Freddie Mac work differently than the FHA or VA. They do not guarantee the loan. If the borrower defaults, the bank loses money. However, Fannie Mae and Freddie Mac do provide the secondary market for lenders to sell their loans. This is why conventional loans meet or exceed the guidelines Fannie and Freddie set.
The Main Benefit of Conventional Loans
Plain and simple, the main benefit of conventional loans is the lack of upfront mortgage insurance. FHA loans are a great first-time homebuyer program as well, but they charge that upfront MI. This means you may have to fork over thousands of dollars before you own your home. You will never see that money again – it goes straight to the FHA’s reserve account. This is how they stay in the business of backing up lenders who write FHA loans. No matter how much your home appreciates, you will not see a return on the mortgage insurance investment. Luckily, conventional loans do not have this insurance.
Minimum Credit Score Required
Now let’s get to the qualifying aspect of the Conventional 97. You know you have to be a “first-time” homebuyer or one overcoming the detriment of a foreclosure at least 3 years ago. Beyond that, you have to watch your credit score. FHA loans allow credit scores as low as 580. In fact, some lenders go as low as 500, but then you have to put 10% down on the home. The 3% down payment conventional program requires a minimum credit score of 620. This is not hard to achieve because 620 is below average. This means even people recovering from an economic disaster may be able to qualify.
Eligible Property Types
Since the Conventional 97 is already a risky loan, Fannie Mae limits the eligible property types. As of now, only the following types of homes qualify:
- Single family homes
The key factor is that it is one unit you purchase. Multi-units are not eligible for this program. In addition, the home must be your primary residence. You cannot purchase an investment or vacation home with this program. You have to be able to prove you will live in the home for eligibility.
Maximum Debt Ratios Allowed
Many people also struggle with their debt ratio when applying for a loan. With the Conventional 97, there are not steadfast maximum debt ratios. As a general rule, though, count on 43% being the highest any lender will go for your total debts. The exceptions to this rule apply when you have other compensating factors. Think of a scale, where one side is heavier than the other. Lenders want to see the scale become level. One side is negative factors and the other side is positive factors. If you have a low credit score, this brings the negative side down. If you also have a high debt ratio, this brings it down further. This is too much risk for a lender. On the other hand, if you had a high credit score and a high debt ratio, they kind of balance each other out. Some lenders may accept the higher debt ratio in these circumstances.
Income Limits for the Conventional 97 Program
The Conventional 97 program does not have income limits like many other programs do that offer little or no down payment requirements. As long as your income covers your debts and keeps your debt ratio as low as possible, you may qualify. You never have to worry about making too much for this program. However, you could make too little and not qualify.
Sourcing the Down Payment
You do not need to use your own funds for the down payment or the closing costs on the Conventional 97. You can use 100% gift funds for both costs. The key is that you can verify the gift funds. This means the lender can easily track them with the receipts you provide as well as the gift letter provided by the donor. The lender needs to make sure the funds are not a loan and that you are not held liable for them at any point. As long as the donor provides a letter stating the date, amount of the funds, the reason for the gift, and that it is not a loan; a lender can use them for your qualifying purposes. This is unlike many other conventional programs that require you to contribute a portion of your own funds for the approval.
The Terms of the Loan
Unlike other conventional programs, there is only one term for the Conventional 97 loan. You must take a 30-year term. This does not mean you cannot make extra payments towards the principal to pay it down. But when you take the loan, it has to be for 30 years. The good news is this might allow you to qualify for a higher loan amount since the payments are lower. This helps to keep your debt ratio down, enabling you to qualify for more.
Don’t forget, however, that PMI applies in this situation. If you only put 3% down on the home, you will owe PMI until you hit below 80% LTV. This means you will likely pay for many years before a lender can remove the PMI. The amount you owe depends on your credit score in combination with your LTV. Since the LTV is high on the Fannie 97 program, you need a high credit score to keep your PMI to a minimum.
The Conventional 97 program allows you to purchase a home with very little down payment while taking advantage of the conventional guidelines. As long as you have the credit and debt ratio to qualify, it is a great program. Compare it to the FHA program to see the difference in your mortgage insurance payments as well as the rates. Remember, though, that FHA mortgage insurance lasts for the life of the loan whereas PMI gets canceled at some point.