Conventional 97 Loan Program | 3% Down Payment
What is the Conventional 97 mortgage?
With great fan fare, the Federal National Mortgage Association
announced on December 8th, 2014 that Fannie Mae was reducing the
down payment percentage to 3% for qualified homebuyers (and homeowners who wish
to refinance). The new home loan program was rolled out to compete with the FHA home loan. I read a number of
articles on line that this low down payment mortgage was superior to the FHA
mortgage . . . but is it? I had my doubts. Here are the details of
the Conventional 97 compared to an FHA mortgage:
- The applicant must be a first time homebuyer or in the case of joint applicants (i.e. husband and wife, partner/partner, etc.), one of the applicants must be a first time homebuyer. A first time homebuyer is a person who has not owned a home in the previous 3 years.
- 3% down payment
- The home must be a single-family attached or detached dwelling, a townhome, condominium, co-op, or row-home. No duplexes, triplexes or four four-unit buildings are permitted.
- The maximum loan amount is 417,000
- There are no income limits with the 97 program.
- Fixed rate loan with a 30-year term only.
- Buyers must have a 620 minimum credit score
- There is private mortgage insurance with the 97 loan.
- Eligible donor(s) providing a down payment and or
closing cost assistance gift include:
parent(s), grandparent(s), spouse, child, or anyone else related by marriage, blood, legal guardianship, adoption, fiancé fiancée or a domestic partner. The down payment and closing cost assistance is required to be a gift with no repayment arrangements.
- Seller paid closing cost (seller assistance). The Conventional 97 will permit the seller to up to 3% of the buyer’s closing and prepaid expenses (i.e. tax and homeowners insurance escrow), with a down payment of 3% to 9%. You can make a larger down payment with the Conventional 97.
Sounds pretty good, right?
Here's a comparison of the FHA loan and Conventional 97 program:
The 97 program permits a larger loan amount in most US counties
($417,000), no upfront mortgage
insurance and the down payment is .5% lower than an FHA mortgage. But . . .
if the homebuyer needs the seller to pay a large percentage of the settlement costs, then the FHA is better. The credit score requirement is lower with an FHA mortgage/loan and there are no first time homebuyer requirements. The FHA does not require the buyer to have additional money in cash savings after settlement. The Conventional 97, 3% down payment loan, (in most cases) requires cash savings. Let's compare the monthly cost and down payment between these two loans:
Which is the the better loan?
If your credit score is less than 620 - go FHA
If you are purchasing a duplex, triplex or four unit dwelling - go FHA
If you need the seller to pay closing costs - go FHA (6% limit)
If you need a co-signer - go FHA
The monthly loan payment with an FHA home loan is superior to the Conventional 97 loan because the monthly cost percentage is lower than the Conventional 97. The 97 loan always beats the FHA loan on down payment. The 97 loan is superior to the FHA mortgage when the loan amount exceeds the customary FHA 271,050 loan amount.