Conventional 97 Loan Program | 3% Down Payment


What is the Conventional 97 mortgage?

Fannie Mae building signWith 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:

Conventioal 97 comparison with FHA

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:

 
  Conventional 97 versus FHA Calculator    
  FHA     97
1. Sales Price  
2. Down Payment % =  
3. Down Payment =    
4. Term 30 Years     30 Years
5. Credit Score  
6. Maximum Mortgage Amount  
7. Base Mortgage Amount    
8. FHA Funding Fee (UFMIP) +     ////////////////////
9. Mortgage Amount (Final) =    
     
  Monthly Mortgage Payment    
10. Principal & Interest    
11. Annual Real Estate Taxes    
12. Annual Homeowners Insurance    
13. Other    
14. FHA MIP =    
15. MONTHLY MORTGAGE PAYMENT =    
 
   
   
     
  Monthly Mortgage Insurance (MIP) Calculation    
Loan Term greater than 15 years (i.e 30 years)    
  Base Loan Amount LTV Effective Annual MIP      
≤ $625,500 ≤ 95.00% 1/26/2015 0.80%      
≤ $625,500 > 95.00% 1/26/2015 0.85%      
> $625,500 ≤ 95.00% 1/26/2015 1.00%      
> $625,500 > 95.00% 1/26/2015 1.05%      
Loan term less than or equal to 15 Years with loan to value above 78%    
  Base Loan Amount LTV Effective Annual MIP      
Any loan amount < 78.00% 6/3/2013 0.45%      
≤ $625,500 78.01% - 90.00% 4/1/2013 0.45%      
≤ $625,500 > 90.00% 4/1/2013 0.70%      
> $625,500 78.01% - 90.00% 4/1/2013 0.70%      
> $625,500 > 90.00% 4/1/2013 0.95%      
  Based on January 9, 2015 change      
     
Conventional 97 Monthly Insurance Rates (MGIC)    
  Credit Score   Effective Annual MIP      
620-679   5/2014      
680-719   5/2014      
720-759   5/2014      
760+   5/2014      
       


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.