3% Down payment mortgages for first-time home buyers

Dan Green
Dan Green
The Mortgage Reports Contributor
April 21, 2022 - 15 min read

3% Down payment mortgage options

Today’s home buyers have a wide variety of low- and no-down payment mortgage options.

If you have good credit, a 3% down payment conventional loan is often the best choice. The conventional 97, HomeReady, and Home Possible loans are all affordable options with just 3% down.

For borrowers with lower credit, an FHA loan with 3.5% down is an excellent alternative.

Ready to explore your 3% down mortgage options? Get started here.


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3% Down conventional loans

A lot of home buyers still associate low down payments with government-backed loans.

But conventional loans — mortgages that are not insured by a federal agency — now offer low down payments, too.

Conventional options with 3% down include:

  • Conventional 97 loan: This 3% down conventional mortgage works for first-time and repeat home buyers with no income limits
  • Fannie Mae HomeReady loan: This 3% down conventional mortgage helps new home buyers who meet income requirements
  • Freddie Mac Home Possible: This 3% down conventional loan also works within specific income limits

The main difference between these programs is their target audience.

The HomeReady and Home Possible programs are intended for low-income and moderate-income home buyers as well as intergenerational households. Both programs are available to first-time and repeat home buyers, although they’re generally geared more toward first-timers.

The conventional 97 loan has a wider appeal. It’s great for home buyers who have good credit but modest savings — or for buyers who want to make a small down payment so their money’s not tied up in real estate. With a conventional 97 loan, unlike HomeReady and Home Possible, there are no household income limits.

Let’s take a closer look at each loan program.

The Conventional 97 mortgage

Today, more and more lenders are offering the 3% down conventional 97 mortgage as an alternative to the standard 5% minimum down payment.

This loan might be perfect if you:

  • Have good credit or excellent credit but modest savings
  • Don’t want to spend all your savings on a down payment and closing costs
  • Want to cancel private mortgage insurance as soon as you can
  • Want to buy a more expensive home than FHA loan limits allow

Unlike HomeReady and Home Possible, conventional 97 has no income limits. But this 3% down option still has more restrictions than higher down payment loans.

For instance, the single-family home you’re buying must serve as your primary residence. Investment properties and vacation homes aren’t allowed under the conventional 97 program.

And, if all borrowers on the loan application are first-time buyers, a homeownership education course is required. (Though this shouldn’t be seen as a con, because these courses can be very valuable.)

The Fannie Mae HomeReady mortgage

Fannie Mae’s HomeReady mortgage program is a great low down payment option for lower-income buyers.

Some of its key benefits include:

  • Renter income can be counted on your application if you’ve lived with them for at least a year
  • Income from non-borrowing occupants can help as a compensating factor on your loan application (however, income limits still apply)
  • You’re not required to spend anything out of pocket. 100% of your down payment and closing costs can come from gifted funds or down payment assistance (DPA)

This ability to count additional sources of income toward your mortgage qualification is almost unmatched by any other loan type, making HomeReady especially attractive for:

  • Multigenerational households with working parents and children
  • Home buyers who want to rent one of their rooms out
  • Borrowers who have a roommate but want to purchase the home on their own

You can even use the HomeReady loan to buy a 2-, 3-, or 4-unit property and rent out the extra units for additional income, as long as you live in one unit yourself. But be aware that multifamily loan requirements are a little bit stricter.

The total household income on your loan application can’t exceed Fannie Mae’s limit, which is set at 80% of your area’s local median income. You can find your local median income using Fannie Mae’s Lookup Tool.

The Freddie Mac Home Possible mortgage

Freddie Mac’s Home Possible Mortgage is very similar to Fannie Mae’s Home Ready.

  • Income limits are set at 80% of the local median
  • Boarder income can be counted on your application if the renter has lived with you for at least one year
  • The full down payment and closing costs can come from gift funds or down payment assistance (DPA)

A key difference: Freddie Mac will count only rental income toward your application. The income of other household occupants, like family members and roommates, can’t help with qualifying for the loan.

Like Fannie Mae, Freddie Mac allows borrowers to purchase a 2- to 4-unit property with 3% down, as long as the homeowner lives in one of the units full time.

3% Down payment mortgage: Eligibility requirements

The conventional 97, HomeReady, and Home Possible mortgages all have similar underwriting rules:

  • Minimum credit score of 620
  • Reliable income and employment
  • Clean credit report (no foreclosures or bankruptcies in recent years)
  • Debt-to-income ratio (DTI) under 43%, in most cases
  • The home must be a primary residence (meaning you’ll live there full-time)
  • Mortgage can’t exceed conforming loan limits; currently $ in most areas
  • A first-time home buyer education course may be required
  • The down payment and closing costs can be covered with gift funds and/or down payment assistance programs

It’s a good idea to find a lender that’s authorized to underwrite all three of these loan types. That way, your loan officer can help you see which is the best fit for your situation.

What is a 97 LTV mortgage?

You might see these loan programs referred to as ’97 LTV mortgages.’ LTV stands for ‘loan-to-value ratio,’ a measure that compares your loan amount to your home’s market value.

In the case of a 97 LTV mortgage, your loan amount is 97% of your home’s value.

LTV is another way to measure down payments. If a loan has a 3% down payment requirement, then the maximum LTV possible is 97%, because you’re contributing at least 3% of the home purchase price out of pocket.

Thus, the conventional 97, HomeReady, and Home Possible loans are all ’97 LTV mortgages.’

Other low-down-payment and no-down-payment mortgage options

Three-percent-down conventional loans have made it easier for potential buyers to become homeowners. But low- and no-down-payment loan options have existed for decades through a variety of federally-backed loan programs.

One of these government loans may work better for your home purchase:

FHA loans: 3.5% down

Conventional loans with low down payments have become more popular, but the FHA loan still has its place.

FHA loans require a down payment of 3.5 percent. Borrowers of any income level — and with FICO scores as low as 580 — can qualify.

This is possible because the Federal Housing Administration insures FHA loans, shielding lenders from losses if the borrower defaults. Borrowers pay for this insurance in two ways: through an upfront fee and through annual fees added to their monthly mortgage payments. This fee is called “mortgage insurance premium” (MIP).

For borrowers with credit scores between 580 and 620, an FHA loan is typically the only viable option. The same is often true for borrowers whose monthly debt-to-income ratio exceeds 43 percent.

Some buyers who qualify for a conventional loan will still save with an FHA loan. However, if you have a good credit score and strong credit history, you’re likely to pay less with a conventional mortgage that doesn’t require upfront MIP and may offer lower mortgage rates.

VA loans: 0% down

VA loans can cover the entire home purchase price. The home buyer does not have to make a down payment at all.

And, VA loans can exceed conforming loan limits without requiring ongoing mortgage insurance — only a one-time funding fee. But they’re available only to veterans and active-duty service members in the U.S. military.

VA loans are backed by the U.S. Department of Veterans Affairs. Thanks to this backing, VA mortgage rates are often around 25 basis points (0.25%) below rates for a comparable conventional loan.

If you’re eligible for a VA loan, it’s most likely your best bet.

USDA loans: 0% down

USDA loans are guaranteed by the U.S. Department of Agriculture, allowing for low mortgage rates and no down payment requirements. These loans also have lower mortgage insurance rates than FHA loans and most conventional mortgages.

Although they’re sometimes called “Rural Housing Loans,” USDA loans can be used in many suburban locations, too. The USDA’s definition of “rural area” covers most of the U.S. landmass.

But buyers must meet income requirements. If you earn more than 115% of your area’s median income, you can’t get a USDA loan. You can check your area’s income limit here.

Plus, USDA loan credit score requirements are higher: Usually at least 640.

Low-down-payment loans and mortgage insurance

The Conventional 97, HomeReady, and Home Possible loans all require private mortgage insurance (PMI)premiums.

This monthly fee — which protects the mortgage lender in case of default — is required on all conventional loans with less than 20% down.

FHA loans require their own brand of mortgage insurance premiums known as “MIP.”

So how do you know which type of mortgage is better?

When a conventional loan with PMI is better

There are some clear benefits to a 3%-down conventional loan over an FHA loan:

  • Conventional loans do not charge an upfront mortgage insurance fee, only an annual fee that’s broken down into monthly installments
  • By comparison, FHA loans charge mortgage insurance upfront and annually
  • Conventional PMI can be canceled once you reach 20% equity. FHA mortgage insurance typically lasts the life of the loan
  • If you have a higher credit score, you get cheaper conventional PMI rates. FHA mortgage insurance rates are the same regardless of credit

Despite these advantages, not every eligible borrower will save with a conventional loan.

When an FHA loan with MIP is better

For home buyers with lower credit, an FHA loan is often better than a 3%-down conventional loan. That’s because FHA does not increase its mortgage insurance rates based on credit score.

If your credit is on the low end for a conventional loan — right around 620 — and you make a 3% down payment, conventional PMI could cost significantly more than FHA mortgage insurance. And the conventional loan mortgage rate may be higher than the FHA loan rate.

In addition, HomeReady and Home Possible both impose income limits while FHA does not. So if you need a lenient loan program but your income is too high for Fannie and Freddie’s programs, FHA may be the answer.

Home buyers should consider all their low-down-payment loan options to see which one has the best balance between interest rate, upfront fees, mortgage insurance, and long-term costs.

The ‘right’ loan type will be different for each borrower.

Compare low-down-payment loan options

Some home buyers choose to make a bigger down payment because it lowers their interest rate and monthly mortgage payment. But a large down payment is not required.

By making a smaller down payment now, buyers can avoid rising home prices and start building home equity. Low down payment choices include:

Loan TypeDown PaymentFeatures
VA loans0%Government-insured loans for veterans and active duty service members
USDA loans0%Government-insured loans for moderate-income buyers in rural and many suburban areas
FHA loans3.5%Government-insured loans for any buyer. Great for borrowers with lower credit scores and higher DTIs
Conventional 973%Conventional loan for any buyer. Great for borrowers with good credit but limited savings
HomeReady3%Conventional loan for moderate- and low-income buyers. Flexible underwriting helps with qualifying
Home Possible3%Conventional loan for moderate- and low-income buyers. Flexible underwriting helps with qualifying

Not sure which type of mortgage you need? You can explore your options using a mortgage calculator or, for a more direct answer, get preapproval from a lender to learn which loan programs you qualify for.

3 percent down mortgage FAQ

Can I get a mortgage with 3 percent down?

Yes. The Conventional 97 program allows 3 percent down and is offered by most lenders. Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs also allow 3 percent down with extra flexibility for income and credit qualification. FHA loans come in a close second, with a 3.5 percent minimum down payment.

Who qualifies for a 3 percent down mortgage?

To qualify for a 3-percent-down conventional loan, you typically need a credit score of at least 620, a two-year employment history, steady income, and a debt-to-income ratio (DTI) below 43 percent. If you apply for the HomeReady or Home Possible loan, there are also income limits. FHA loans allow a minimum FICO score of 580 and no income limits but have a 3.5 percent down payment requirement.

Can first-time buyers use the Conventional 97 program to purchase a home?

Yes. You can use the 3-percent-down Conventional 97 loan if you are a first-time buyer or repeat buyer.

What is the definition of a first-time home buyer?

For most programs, you’re a first-time homebuyer if you have not owned a home within the last three years. There are other exceptions to this rule for those with homes that can’t be repaired to livable standards, those with mobile homes (personal property), and others.

Is the Conventional 97 the same as the HomeReady program?

No, these are two different mortgage programs. The HomeReady loan is aimed at applicants who meet income eligibility guidelines, putting them in the low- or moderate-income categories. The Conventional 97 has no income limits and is more widely available.

Are down payments larger than 3 percent allowed with the conventional 97 program?

There is no limit to the size of your down payment with a conventional loan. If you put down 5 percent or more, you will no longer be using the Conventional 97 mortgage, but rather a Conventional 95 loan. With 10 percent down or more it’s just a ‘standard’ conventional loan. The bigger your down payment, the lower your interest rate and monthly payments.

Is the 3-down mortgage via Fannie Mae and Freddie Mac better than an FHA loan?

There is no ‘best’ low-down-payment mortgage program. What’s best for one home buyer may not be what’s best for another. Each program has its benefits and drawbacks. To find the right program, compare interest rates, mortgage insurance rates, upfront fees, and interest paid over the life of the loan. Consider how long you’ll stay in the home and how much you want to pay upfront.

Can I use an adjustable-rate mortgage (ARM) with the Conventional 97?

No, the conventional 97 does not allow adjustable-rate mortgages, only fixed-rate mortgage loans with terms up to 30 years.

What is the loan limit on the 3 percent down program through Fannie Mae and Freddie Mac?

Conventional loans with 3 percent down can’t exceed Fannie Mae’s conforming loan limit. ‘High-balance conforming loans’ — those with higher loan limits in expensive areas — are not allowed under the Conventional 97 program.

What is the maximum number of units for a home under the 3 percent down payment program?

The Conventional 97 program allows only single-family primary residences (meaning a one-unit house, condo, or co-op). However, the 3-percent-down HomeReady and Home Possible loans allow 2-, 3-, and 4-unit properties.

Are vacation homes eligible under Conventional 97?

No, the 3 percent down payment program is for primary residences only. You’ll need a different loan for vacation or second homes.

Can I use the Conventional 97 for investment properties?

No, the 3 percent down-payment program is for primary homes only. You can’t finance a rental or investment property with this product.

Does the Conventional 97 mortgage program require home buyers to attend home-buyer counseling?

If all borrowers on the mortgage application are first-time home buyers, at least one borrower will need to attend an online home buyer education course.

Does Conventional 97 require mortgage insurance?

Yes, mortgage applicants must pay private mortgage insurance (PMI) premiums. However, unlike FHA loans, conventional PMI can be canceled once the homeowner has at least 20 percent home equity.

Does the 97 percent mortgage program allow cash-out refinancing?

No, the 97 percent mortgage program does not allow cash-out refinances. Borrowers may do a cash-in refinance or a “limited cash-out” refinance only.

Can I get a jumbo loan with 3 percent down?

No, low down payment loan options typically do not exceed conforming loan limits. Jumbo mortgages are non-conforming loans, and they tend to come with higher down payment and credit score requirements. One exception: A VA loan can exceed conforming loan limits without requiring a down payment, but only for borrowers who aren’t already using their VA loan entitlement.

Today’s mortgage rates for home buyers

As mortgage rates and home prices trend higher, many home shoppers don’t want to wait until they’ve saved a large down payment. They want to buy as soon as possible.

Today’s 3% down conventional loans — along with federally insured loans like FHA and VA loans — lower the barriers to homeownership, allowing shoppers to buy a home sooner.

Which low down payment option is right for you? A mortgage pre-approval can estimate your actual costs for different loan types.


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