If you’re a first-time homebuyer on the hunt for a new home, but are looking for options that don’t require a 20% downpayment, you may want to consider applying for a conventional 97 mortgage loan.
A conventional 97 loan is a mortgage option that allows homebuyers to borrow 97% of a home’s value, meaning you only have to provide a 3% down payment. This can make the dream of homeownership a reality that much faster for first-time buyers who don’t have a lot of cash.
Conventional 97 loan pros
As one of the lowest home down payment options on the market, conventional 97 loans are a great tool for first-time homebuyers. Of course, the terms and requirements will vary depending on the lender you select. For the most part, all conventional 97 home loans provide buyers with the following benefits:
- 3% down payment: Spend less time saving up prior to purchasing a home and buy it that much sooner. Plus, you’ll be able to put your savings toward other goals and possible renovations in your new home.
- Ability to cancel mortgage insurance later: As a result of the low down payment, you’ll be required to pay for mortgage insurance each month. However, you’ll have the option to cancel your mortgage insurance once you have enough equity in your home.
Conventional 97 loan cons
As great of an option as these loans seem to be, it’s important to consider their drawbacks before you sign on to one. You may be saving money up front, but that may mean you’re spending more each month when you factor in interest rates and more, including:
- Requires private mortgage insurance (PMI): While you may save more up front with a low down payment, you will be required to pay for mortgage insurance that may increase your monthly payments.
- The loan amount can not exceed conforming limits for the county in which the property is located. This may limit your home options or the areas where you can shop for one.
Getting a conventional 97 loan
Other than only requiring a 3% down payment, getting conventional 97 home loans work like any other conventional mortgage loan. You’ll have to find a trusted lender who offers them, apply, and be approved for funding. However, conventional 97 loans do have qualifications you must meet in order to be eligible.
For instance, the 97 loan program is only available to first-time buyers. A first-time buyer is defined as a borrower who hasn’t owned a home in the past three years. There are a few more qualifications you must meet, including:
- Loan must be a fixed-rate mortgage
- Property must be a primary residence
- Must have a debt-to-income (DTI) ratio of no more than 43%
- House must be a one-unit, single-family home, co-op, or condo
- Borrower must take a homebuyer education course
- The loan must be equal to or less than $766,550
- Have a credit score of at least 620 or higher
These requirements will probably feel much more achievable to many first-time homebuyers.
Conventional 97 loan interest rates
The interest rates for conventional 97 loans are based on the standard Fannie Mae rates, but have a slight rate increase due to their low down payment requirement.
You’ll also have to factor in the cost of PMI to your monthly mortgage payments. However, you’ll save more money up front when you close on the home purchase. For many buyers, the extra costs per month are worth the cheaper down payment and ability to buy a home faster than if they had to wait and save.
Conventional 97 loans vs. FHA loans and other options
Government-backed loans like an FHA and conventional 97 loans make it easier for buyers to purchase a home without paying a large down payment. Unlike FHA loans, though, conventional 97 home loans are not government backed. This makes them riskier investments for lenders, resulting in increased interest rates, PMI requirements, and other added costs.
FHA loans are still a great option for first-time borrowers. FHA loans do require mortgage insurance premiums (MIP) that don’t go away unless you put down 20% or more. You’ll be required to pay these premiums until the loan is refinanced or paid off.
Why choose a conventional 97 loan?
Conventional 97 loans are a helpful tool that reduce a huge obstacle for many first-time homebuyers — the down payment. However, it’s important to keep in mind that reducing your down payment may lead to other expenses like a higher monthly payment.
Be sure to shop around for a lender so you know you’re getting the best rate and terms, no matter what mortgage loan you decide on. It’s always best to speak with a financial expert so you know all of your mortgage options before you sign on the dotted line.