Home buying just got a lot easier. Fannie Mae and Freddie Mac, the country’s two main mortgage rule setting agencies, now allow home purchases with just a 3% down payment.

The new 97% loan-to-value (LTV) purchase program allows homebuyers to purchase a single family home, condo, co-op, or PUD without coming up with a full 5% down payment as previous guidelines mandated. The changes went into effect December 13, 2014.

Now that conventional 3% down loans are a reality, buyers have a real alternative to FHA. While the FHA loan has its benefits, it comes with high upfront fees and permanent mortgage insurance.

The new conventional 97% LTV program is a safer bet for the future, requiring no upfront mortgage insurance fees and cancellable monthly PMI.

2015 Conventional 97% LTV Home Buying Guidelines

The new 3% down loan is similar to existing conventional loan programs. Rates are low and lenders who approve loans based on Fannie Mae and Freddie Mac rules are widely available.

The new program comes with guidelines that many of today’s buyers will meet. Three percent down loans with the following characteristics will be considered for approval:

• The mortgage is a fixed rate loan.
• The property is one-unit single family home, co-op, PUD, or condo.
• At least one buyer has not owned a home in the last three years.
• The property will be the owner’s primary residence.
• The loan amount is at or below $417,000

These features align well with the typical first time homebuyer’s profile.  For instance, most buyers today are looking for a one-unit home (as opposed to a duplex or triplex), or a condo that they plan to live in.

Today’s average home price is around $255,000 according to the National Association of Realtors, putting most homes nationwide in reach with just a 3% down payment.

Conventional 97% LTV Credit Requirements

Many homebuyers assume they need impeccable credit scores to qualify for a loan that requires just 3% down. That’s not the case.

According to Fannie Mae’s Loan Level Price Adjustment (LLPA) chart, a borrower can have a score as low as 620 and still qualify.

What’s even more impressive when reviewing the LLPAs is that some borrowers will receive the same or lower rate for a 3% down loan compared to those with 20% down.

For instance, a borrower putting 20% down (80% LTV) and a 660 score will receive a rate increase of about three-eighths of one percent because of their credit score and LTV combination. The same borrower who puts 3% down will receive approximately the same rate.

That does not make sense at first, until you realize that mortgage insurance takes risk off of Fannie Mae and the lender. If the borrower defaults, the mortgage insurance company reimburses the owners of the mortgage. The 20% down loan does not require PMI, but the 3% down loan does.

The mortgage insurance would make the 3% down option more expensive on a monthly basis. However, the borrower’s down payment requirement is substantially lower, allowing them to buy a home much sooner, or buy at all.

And remember that non-FHA mortgage insurance is cancellable. When the loan balance reaches 78% of the property’s value, PMI automatically drops off.

Homeowners who choose the conventional 97% LTV loan option will end up with a great fixed interest rate, and after paying down the loan balance, no more PMI.

97% LTV Home Purchase Program Rates

Mortgage rates for the 3% down payment program are based on standard Fannie Mae rates, plus a slight rate increase.

But these loans will come will come with rates only about a one-eighth to one-quarter of one percent higher than rates available to borrowers putting 5-10% down.

The fee or rate increase is minimal compared to the value added from earlier home buying.

Someone buying a $250,000 home would pay about $60 more per month by choosing the 97% loan option compared to a 5% down loan.

Yet, the buyer reduces their total upfront home buying costs by over $5,000.

The time it takes to save an extra 2% down payment could mean higher home prices and tougher qualifying down the road. For many buyers, it could prove much cheaper and quicker to opt for the 3% down mortgage immediately.

97% LTV Home Purchase Q&A

Is there a minimum credit score for the 3% down payment program?

Borrowers need a credit score of 620 or higher to receive any Fannie-Mae backed loan. The exception would be those with non-traditional credit who have no credit score. However, it’s likely lenders will require traditional credit with a 640 or 660 minimum score for this program.

Can I use down payment gift funds?

Yes. Fannie Mae states gift funds may be used for the down payment and closing costs. There is no minimum amount the borrower has to put toward the purchase from their own funds.

Can I buy a condo or townhome?

Yes. Buyers can purchase a condo, townhome, house, or co-op as long as it is only one unit.

Can I buy a manufactured home with 3% down?

No. Manufactured homes are not allowed with this program.

Can I buy a second home or investment property?

No. The 97% loan program may only be used for the purchase of a primary residence.

I owned a home two years ago but have been renting since. Will I qualify?

Not yet. You must wait until three years have passed since you had any ownership in a residence. At that point you are considered a first time home buyer and will be eligible.

Will mortgage insurance companies provide PMI for the 97% LTV home loan?

Yes. Mortgage insurers are on board with the program. You do not have to find a PMI company since your lender will order mortgage insurance for you.

How much is mortgage insurance?

Mortgage insurance varies widely based on credit score, from $75 to $125 per $100,000 borrowed, per month.

Can I get a conforming jumbo loan with 3% down?

No. At this time, high balance, AKA conforming jumbo loans – those that are over $417,000 – are not eligible.

I’m already approved putting 5% down, but I’d like to make a 3% down payment instead. Can I do that?

Yes. Your lender can re-underwrite your loan if they offer the program. Keep in mind your debt-to-income ratio will rise with the higher loan amount and potentially higher rate.

What’s the maximum debt-to-income (DTI) ratio for the 97% LTV program?

Your overall profile including credit score determine your DTI maximum. While there’s no hard-and-fast number, most lenders set a maximum DTI at 43%. This means that your future principal, interest, tax, insurance, and HOA dues plus all other monthly debt payments (student loans, credit card minimum payments) can be no more than about 43% of your gross income.

Can I use the 3% down program to refinance?

Yes. If you have an existing Fannie Mae loan, you may be able to refinance up to 97% of the current value. This could be useful to homeowners who are not HARP eligible because their loan was opened after May 31, 2009.

Why is the program only for first time home buyers?

Fannie Mae’s recent research uncovered that the biggest barrier to homeownership for first time homebuyers was the down payment requirement. To spur more people to buy their first home, the minimum down payment was lowered.

Are there income limits?

The standard 3% down program does not set limits on your income. However, the My Community Mortgage (MCM) 97% loan does require the borrower to be at or below either 100% or 115% of the area’s median income, depending on property location.

What is a My Community Mortgage (MCM)?

This is a program that reduces some fees for low and moderate income borrowers. The 97% LTV option is available for this loan type. The program reduces various Fannie Mae fees for credit score and loan to value, called Loan Level Price Adjustments (LLPAs). It also reduces mortgage insurance costs. Homebuyer education is required.

What is the Home Possible Advantage program?

This is Freddie Mac’s 3% down home buying program. It is a lot like the My Community Mortgage program. Borrowers must not make more than set income limits, and it is for first time homebuyers purchasing a primary residence.