Fannie Mae’s Conventional 97 Loan

Being able to afford the down payment on a home purchase is a major concern for many home buyers. This is especially the case for first-time home buyers, as they may not be sure what a standard down payment is like. It’s often repeated that you should plan for 20% down, but is that actually the case? Are there options out there to reduce this percentage and keep your down payment as low as possible?

The answer, of course, is yes. There are a number of loan programs out there that can keep you well under a 20% down payment. Some programs even allow you to pay as low as 5%-10% down when purchasing a new home. But if you’re really looking for your best option, you might want to look at the Conventional 97 mortgage program from Fannie Mae. This loan can let you borrow up to 97% of the value of your home, leaving you with just 3% to cover as a down payment.

What Is a Conventional 97 Loan?

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As the name implies, a Conventional 97 loan is a mortgage that allows you to have a loan-to-value (LTV) ratio of as high as 97%. This means that if you’re purchasing a home with a $100,000 asking price, you can borrow up to $97,000 and will have just $3,000 to put down as your down payment.

You can obviously see the appeal of a Conventional 97 mortgage versus some other popular loan types. These loans are designed to help buyers get the homes they want even if they don’t have a huge amount of cash on hand. This gives these loans a definite advantage over some other loan types, especially those that require down payments of 10%-20% of the home’s total value.

This doesn’t mean that Conventional 97 loans are a one-size-fits-all mortgage product, of course. A Conventional 97 might be just what one borrower needs, while another borrower might find a better loan for their situation somewhere else. To determine which mortgage option is right for you and your financial situation, it’s important to look at all of your options and see which one works best for your specific scenario.

 Conventional 97 Loan Origins

The Conventional 97 mortgage was created to serve as something of an alternative to loans backed by the Federal Housing Administration (FHA), giving potential buyers more options when it came to choosing a loan product. Though Fannie Mae is sponsored by the federal government, it exists as an independent company and the loans it offers are not government-backed loans.

Conventional 97 loans were created in part based on research into the barriers faced by first-time home buyers. Fannie Mae found that one of the biggest problems that first-time homeowners ran into was trying to save up enough money to cover a down payment and closing costs for a mortgage loan. Taking inspiration from the popularity of FHA loans, the company created a new loan product that would make home ownership easier for first-time buyers (while still providing value to repeat buyers as well).

Conventional 97 Loan Terms

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

    • Cooperative

    • Condominium

    • 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

    • Grants

    • Seasoned cash-on-hand

How a Conventional 97 Mortgage Works

The Conventional 97 mortgage is similar to other loan products that you’ll see on the market, but there are a few unique features to the loan as well. Though the specifics of your loan will depend on your unique situation, here is a general idea of what you can expect from a Conventional 97 loan:

  • First-Time Home buyers: Fannie Mae restricts Conventional 97 loans to “first-time” home buyers, though this is a bit of a misnomer; you can still qualify if you’ve owned a home before, just so long as you haven’t owned property in the last three years. If there are multiple borrowers signing on the mortgage, only one of them needs to be a first-time home buyer to qualify.

  • Credit Requirements: According to Fannie Mae, borrowers may qualify for a Conventional 97 loan with a credit score as low as 620. But in general, it is recommended that you have a credit score of at least 680 to qualify for all of the features of the loan.

  • Fixed-Rate Loan: The Conventional 97 is a fixed-rate 30-year mortgage. While some competing loan products may feature adjustable interest rates, the rate is locked in for a Conventional 97 loan. Typically, the rate will be around 25 basis points (0.25%) higher than other loans of the same type to offset the lower down payment.

  • Property Value: The maximum property value that you can purchase with a Conventional 97 loan is based on the area in which the property is located. For most counties, the value of the property is capped at around $453,100 (though this may change based on Fannie Mae policies). For counties that are designated “high-cost” counties, this amount is increased to around $679,650. Fannie Mae provides an online lookup tool here to let potential home buyers search for properties by address to find out the exact value caps.

  • Income Limits: There are no income limits on Conventional 97 loans.

  • Property Types: Homes purchased with a Conventional 97 mortgage must be single-unit dwellings that the buyer intends to use as a primary residence. Multi-unit properties are not allowed, and no investment or vacation properties are allowed. The property can be a house, condominium, or co-op, or it can be part of a planned unit development (PUD). Manufactured homes are not eligible for Conventional 97 loans.

  • Mortgage Insurance: Mortgage insurance is required for Conventional 97 loans. Once a specified amount of equity has been created (typically 20%), the mortgage insurance can typically be canceled. An Upfront Mortgage Insurance Premium payment is not required.

  • Down payment Sources: Fannie Mae allows multiple sources of down payment funds on top of traditional savings. There is also no minimum percentage of the borrower’s contribution if multiple funding sources are used. For a Conventional 97 loan, you can use all of the following as a source for a down payment:

    • Savings

    • Gifted funds

    • Grants

    • Cash on hand (must have had the money for at least 60 days)

    • Community Seconds mortgage funds

The specifics of your loan may differ based on your credit score, prevailing rates, and any other details that are unique to your borrowing situation.

Qualifying for a Conventional 97 Loan

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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. 

Provided that you fall within the program requirements for a Conventional 97 mortgage, qualifying is a fairly simple process. You (or someone signing on the loan) must qualify as a first-time home buyer, you have to have a qualifying credit score, and the property being purchased needs to meet program requirements. Mortgage insurance is required, but you don’t have to make an upfront premium payment as part of the closing costs on the loan so you won’t need additional funds to cover that cost.

Proof of income is required as part of the application process. Unlike with some loans, you can still qualify for a Conventional 97 loan even if you are self-employed and don’t have payroll stubs to prove your income levels. For the self-employed, at least two years of federal income tax returns are required to show consistent income amounts over the reported time period.

It can take up to a month before your loan is approved, though underwriting and final approval typically occur in 20 to 30 days. Depending on your situation, it’s possible that you may not qualify for the full 97% LTV coverage. This decision will likely be based on factors such as your credit score and income level, though it’s possible that other aspects of your situation or features of the property itself may come into consideration as well.

Is This the Same Thing as a HomeReady Loan?

Conventional 97 loans are sometimes confused with HomeReady loans, which are another low down payment mortgage product from Fannie Mae. It’s understandable, since both loans were designed to make home ownership more accessible and both feature low down payments for those who qualify. But the two are separate loan programs, with HomeReady loans targeting a slightly different segment of borrowers than Conventional 97 mortgages.

The HomeReady program is specifically aimed at helping those in the low-to-moderate income bracket to secure home financing. It also features a 97% LTV and has some of the same innovative features as the Conventional 97 such as the ability to cancel mortgage insurance once the buyer builds 20% equity. A few unique underwriting scenarios such as having income from boarders is also allowed. A mandatory homeowner education class is also required for HomeReady mortgages, though this can be done online using Fannie Mae’s online Framework tool. Only individuals who fall within the income range of the loan can qualify for a HomeReady mortgage.

Unlike HomeReady, the Conventional 97 program is open to borrowers from a wide range of incomes. If you fall within the income limits of HomeReady and meet its other qualifications, you would likely apply for this Fannie Mae product. If you don’t qualify for HomeReady, though, you can still apply for a Conventional 97 loan through Fannie Mae.

Are You an Ideal Conventional 97 Borrower?

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After you’ve taken the time to learn about Conventional 97 loans, it’s worth taking a moment to see how good of a match the loans are to your current situation. While you can technically qualify for a Conventional 97 loan with a FICO credit score as low as 620, you may not get all that you want out of the loan if you expect to go in with just the bare minimum requirements.

Look back over the list of loan requirements and ask yourself just how well you match up with what Fannie Mae is looking for in a borrower. Do you (or your co-signer) qualify as a “first-time” home buyer, or will you need to wait a bit before that three-year time frame passes? Do you have at least the recommended 680 credit score? You may still qualify for a loan even if you don’t meet the credit score recommendation, but you won’t get nearly as good of an interest rate and some loan features such as mortgage insurance cancellation may not be available as quickly as you’d like.

If you want to make sure that you meet all of the program’s requirements, you may have to take a little time to fix a few problems before you apply for a loan. Bring down your debt-to-income ratio so that it’s well below 43%, meaning that the total amount of your debts makes up less than 43% of your annual income. Make sure that you’re making all of your bill payments on time, and pay off old bills and outstanding debts as much as possible. You’ll want to bring down your outstanding debt and build up your credit score as much as you can before you’re ready to apply. Keep in mind that it can sometimes take a few months for these changes to reflect in your credit report, so start early!

You should also think about how the loan payments will fit into your budget and make sure that you’re OK with a locked-in interest rate. While a fixed rate will protect you against shifts in the market in the future, you’re going to have that same rate for 30 years and it could end up being higher than what you would pay with some other loans. That’s one of the big drawbacks of fixed rate loans, but unfortunately that’s the only option available with the Conventional 97 mortgage.

Conventional 97 Refinancing

If you already have a mortgage, it may be possible to refinance it into a Conventional 97 provided that the original loan is also owned by Fannie Mae. This can help you reduce your monthly payments and may get you a better deal on your interest rate than what you were paying in your original loan. If you aren’t sure whether Fannie Mae owns your original loan, you can ask your current lender whether the loan was underwritten by Fannie Mae.

It’s worth noting that you cannot perform a “cash out” refinance with a Conventional 97 loan. This means that you can’t refinance a home that you already have a mortgage for and borrow an additional amount on top of the remaining loan value. An example of this would be having a mortgage on a $250,000 home that you’ve built $150,000 worth of equity on, then trying to refinance the remaining $100,000 by taking out a $150,000 loan. You would get $50,000 “out” of the equity on top of the loan, and Fannie Mae won’t allow this with Conventional 97 refinancing.

You can perform a “cash in” refinance with a Conventional 97 loan (meaning that you make an additional down payment to pay down the principal of the original loan). You may also be able to do what’s known as a limited cash-out refinance, which allows you to refinance and receive a small sum out (typically the lesser of 2% of the loan amount or $2,000).

How Does a Conventional 97 Compare to FHA Loans?

Conventional 97 loans are often compared to FHA loans, and with good reason. Both loan types are designed to make it easier for individuals to purchase a home without a large down payment, and in many cases they both make home ownership possible for people that wouldn’t be able to get a more standard loan. Because of the lower down payment required, some claim that Conventional 97 loans are “better” than FHA loans, but this entirely depends on your situation.

If you have decent credit and don’t mind being locked in to a 30-year loan, the Conventional 97 might be a better option for you. If your credit is less perfect or you want a bit more flexibility when it comes to your loan options, though, you might be better off with an FHA loan instead. Your Conventional 97 will get you a lower down payment and give you a chance to cancel your mortgage insurance down the road, but the FHA loan will likely give you a better interest rate over the course of the loan term. There are a lot of things to consider when trying to choose which one is the “better” option for you.

Because of this, it’s difficult to make a direct comparison between the two loan types. While they obviously have similarities such as requiring low down payments, there are enough differences that you can’t just pick a single data point (such as the down payment) and declare one loan program superior to the other.

What About VA and USDA Loans?

There are other government-backed loans besides FHA loans that you might qualify for. Some of these are even more appealing than the Conventional 97 since in some cases they offer as little as 0% down on their loan products. The two most prominent of these are loans from the Veterans Administration (VA) and rural development loans from the United States Department of Agriculture (USDA).

As with the FHA loans, a direct comparison between Conventional 97 loans and VA or USDA loans is difficult because of the differences among the loan products. VA loans are available only to individuals who have served in the Armed Forces (and their families), so many potential home buyers wouldn’t qualify for these loans at all. Likewise, USDA loans are available only for properties located in rural areas and are available for some properties that you couldn’t purchase with a Conventional 97.

Instead of comparing these loans and trying to figure out which one is “best” across the board, it’s a much better idea to look at your specific situation and try to match it with the loan that will best meet your needs. Whether it is a VA loan, a USDA loan, an FHA loan, or a Conventional 97, the time you spend matching a loan product to your circumstances will go a long way toward finding the loan that most closely lines up with what you actually need from a loan product.

Conventional Loans: In Review

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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!

Conventional 97 Loan FAQ Knowledge Base