What is a Conventional 97 home loan?

Woman sitting at home, reading on her laptop about conventional 97 loansImage: Woman sitting at home, reading on her laptop about conventional 97 loans

In a Nutshell

A Conventional 97 home loan only requires 3% down. But you’ll have to budget for mortgage insurance and meet certain requirements. We take a look at Conventional 97 mortgages and what makes them an option to consider for those who need a low down payment loan.
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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, a Conventional 97 home loan is an option worth considering.

A Conventional 97 home loan lets you borrow 97% of the home’s value, so you’ll only have to put 3% down. If your credit is pretty good and you want an affordable low down payment alternative to an FHA mortgage, a Conventional 97 home loan might be worth considering.

Here’s a closer look at what a Conventional 97 home loan is, who qualifies and how it compares to other programs.

What is a Conventional 97 loan?

Provided by Fannie Mae and Freddie Mac, a Conventional 97 loan is designed to make homeownership a reality for buyers who have been trying to save for a house but don’t have a lot of cash.

With a Conventional 97 loan, you can pay as little as 3% down. That means the loan-to-value, or LTV, ratio can be up to 97% — hence the “97” in the name Conventional 97.

Let’s say you want to purchase a home for $150,000. If you go with a Conventional 97 loan, you can borrow up to $145,500 and only have to come up with $4,500 to put down.

Your down payment can come from savings, cash that you have on hand, gifts, grants, employer-assistance programs and Community Seconds mortgage funds. You’ll also have to budget for private mortgage insurance, or PMI, just as you might with other types of conventional mortgages.

Types of Conventional 97 loans

  • Fannie Mae HomeReady Loan: This program is for lower-income homebuyers with a minimum credit score of 620 who don’t have a large down payment. Mortgage insurance is required but you can apply to cancel your PMI once it reaches 80%. Income restrictions apply and homebuyer counseling is required.
  • Fannie Mae 97% LTV Standard: This loan program is for first-time buyers — and it doesn’t have income restrictions. The 97% LTV Standard program requires a minimum 620 credit score, and you’ll have to get mortgage insurance. If you use this program, you’re offered a choice between the standard insurance coverage level of 35% or a minimum coverage level of 18%. The Fannie Mae HomeReady program does not offer this choice.
  • Freddie Mac Home Possible Loan: The Freddie Mac Home Possible Loan caters to low-to-moderate income borrowers with a credit score of at least 660 who have 3% for a down payment. You’ll be required to pay for PMI until your loan balance goes down to at least 80% of its value. Income caps apply unless you’re buying in an “underserved” area.
  • Freddie Mac Home One: Home One also offers a 3% down mortgage loan with mortgage insurance required. The Home One program has no income limits, but if you are a first-time homebuyer you’re required to take a homebuyer education class. Certain restrictions apply, including approval for fixed-interest rate loans only, and these loans are for single-unit, owner-occupied residences.

Who qualifies for a Conventional 97 mortgage?

There are certain general requirements you’ll need to meet to be approved for a Conventional 97 mortgage. You must …

  • Have a credit score of at least 620 or 660, depending on the program.
  • Meet income limits depending on the loan.
  • Plan to live in the property as your primary residence.
  • Complete a homebuyer education course in typical cases.

Some Conventional 97 mortgages require that at least one home buyer hasn’t owned a home in the past three years. Income limits, where applicable, may depend on the location of the property you’d like to buy.

How do Conventional 97 mortgages differ from other conventional loans?

There are several important ways Conventional 97 loans differ from conventional mortgages.

  • Down payments: Conventional mortgages may require higher down payments than Conventional 97 mortgages, especially if you want to avoid paying a mortgage insurance premium.
  • Primary residence: Conventional loans are typically for all kinds of residences, including primary residences, second homes, and vacation properties — while Conventional 97 mortgages are typically offered for primary residences only.
  • Extra restrictions and requirements: You may also find that a Conventional 97 loan has, depending on the program and the type of mortgage you choose, income restrictions and homebuyer education requirements that conventional mortgages may not impose.

How do Conventional 97 mortgages compare to FHA home loans?

Both Conventional 97 mortgages and FHA loans make it easier for people to buy a home without a large down payment. The Conventional 97 home loan requires a 3% down payment, and you’ll need a minimum 3.5% down for an FHA loan. Here are some other differences.

  • Number of units: FHA mortgages allow loans for properties with up to four living units but you may find some Conventional 97 loans are approved for single-unit residences only.
  • Mortgage insurance: FHA-insured loans come with two types of mortgage insurance premiums: an upfront fee plus a monthly FHA mortgage insurance premium. Conventional 97 mortgages have monthly or annual mortgage insurance options that may vary depending on the loan, the loan-to-value ratio, etc.
  • Qualifying credit scores: Compared to FHA loans, Conventional 97 mortgages are a bit harder to qualify for. FHA loan guidelines state FICO scores of 580 or higher technically qualify for the lowest down payment. Compare that to the 620 or 660 minimum FICO score requirements Fannie Mae and Freddie Mac list for certain Conventional 97 loans. Note that these are loan program guidelines, and other lender requirements may apply.

What’s next?

If you’re interested in a Conventional 97 home loan, it’s a good idea to compare participating lenders and loan options. When you’re looking into these loans, ask for a side-by-side comparison of Conventional 97, FHA, and other loan options. That may help you better understand your choices about both your home loan and the lender.  

About the author: Anna Baluch is a freelance personal finance writer from Cleveland, Ohio. You can find her work on sites like The Balance, Freedom Debt Relief, LendingTree and RateGenius. Anna has an MBA in marketing from Roosevelt Un… Read more.