Fannie Mae’s Conventional 97 Loan
One of the largest concerns that home buyers have when shopping for a new home is how to handle the down payment. Most new home buyers have heard of the “ideal down payment of 20%”, which can be quite frightening. Because of this, there have been a few loan programs that began offering low to zero down payment loans, each with some strict eligibility requirements.
The VA home loan, for example, doesn’t require down payments for its borrowers, but it does require borrowers to be current or former members of the United States Armed Forces. USDA loans typically have lenient down payment requirements, but are restricted to home buyers that live in USDA-specified rural areas.
The most popular low down payment option for the average home buyer has been the FHA home loan, which allows borrowers to make down payments as low as 3.5%, with the caveat that they must also pay mortgage insurance premiums both upfront and with their monthly payments.
For home buyers trying to escape the financial burden of a 20% down payment, those three government-backed loan programs used to be the only choices they had. That is, until 2014 when Fannie Mae launched the 97% LTV loan program. Fannie Mae’s foray into the low down payment loan market comprises two separate loan options: HomeReady Mortgages, and the Conventional 97 home loan -- Both of which tout down payments as low as a mere 3 percent.
Conventional 97 Loan Basics
Named after the program’s loan structure of a maximum loan to value (LTV) of 97%, the conventional 97 home loan was created with the intention of transforming a higher rate of “potential home buyers” into full-fledged home owners. Geared toward first time home buyers, Fannie Mae’s answer to the ever popular government sponsored FHA home loan isn’t one to pass up for home buyers looking for a more conventional home loan solution. While holding borrowers to a higher credit standard than the FHA program, home buyers who fit the criteria could actually save more money upfront with the conventional 97 loan than with an FHA loan, although the interest rates are generally .25% higher overall.
The conventional 97 loan program requires borrowers to accept a fixed rate mortgage of up to 30 years. In terms of the actual property, the loan dictates that homes purchased through the program must be owner occupied. They must also be one-unit single family homes, co-ops, PUDs, or condos. There is no required income limit with the program, but at least one of the borrowers must not have owned a home within 36 months of applying for the loan. Overall, the program’s standard conventional home loan requirements make it an appealing option for future homeowners to consider.
Conventional 97 Loan Facts
The conventional 97 loan follows most (but not all) of the common terms of standard conventional loans. A breakdown of the programs highlights include:
- Loan Limits: Loan amount must not exceed conforming limit for the county in which the property is located
- Loan Type: Must be a fixed-rate mortgage with a term not exceeding 30 years
- Property Type/Eligibility: Must be owner occupied. Cannot be an investment property. Eligible property types include:
- Single-Unit family home
- Planned unit development (PUD)
- Mortgage Insurance: While no upfront fee is required, borrowers must pay private mortgage insurance (PMI), a standard for conventional loans of 80% LTV or higher. PMI is typically removed once the borrower’s LTV reaches 78%.
- Down Payment: No less than 3% of purchase price. No minimum contribution from borrower required. Payment can be sourced from:
- Gift funds
- Down payments sourced from a gift may raise the credit requirement for the loan
- Community seconds
- Seasoned cash-on-hand
- Gift funds
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Who Is the Ideal Borrower for a Conventional 97 Loan?
The Conventional 97 loan is a great solution for first time home buyers who might find it hard to come up with the funds needed to make a large down payment on their home loan. The typical borrower for the program:
- Has better than average credit
- Isn’t swamped with debt obligations
- Is comfortable with a fixed rate mortgage
- Is willing to make monthly mortgage insurance payments
Remember, conforming conventional mortgages such as this one are favored by lenders, as they are typically reserved for low-risk borrowers. If you are approved for one, it typically means that, at least from the lender’s perspective, you are capable of handling the cost of the loan, and the monthly payments.
Conventional 97 Loan Eligibility Requirements
You’ve learned about the loan, but what about the loan requirements? With only slightly more strict credit requirements than its FHA counterpart, qualifying for a conventional 97 loan isn’t too different from qualifying for most conventional loans, with a few exceptions. Borrowers looking to take advantage of the program must fit the following criteria:
- Must have a credit score of 620 or higher
- At least one borrower must qualify as a first-time home buyer
- Must not have owned a home within three years of applying for the conventional 97 loan
- Must have a debt-to-income ratio (DTI) of no more than 43%
Additionally, conventional 97 loans have no income limit, which is another trait that sets it apart from other low down payment loan options.
Conventional Loans: In Review
If you’re looking to make the lowest possible down payment on your home purchase, you have options. The Federal Housing Administration offers one of the best home loan solutions on the market for this scenario, if you don’t mind paying the lifetime mortgage insurance that comes with it.
Boasting down payment requirements of only 3% (a whole .5% lower than FHA home loans!), and PMI that is removed once LTV reaches 78%, Conventional 97 loans are a huge contender for first time home owners.
If you meet the heavier credit requirements, you might be surprised how much money you could save!