Home buying just got a lot easier. Fannie Mae and Freddie Mac, the country’s two main mortgage rule-making agencies, now allow home purchases with just a 3% down payment.
The 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. Now just a 3% down payment is needed. That’s even lower than FHA requires.
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.
2017 Conventional 97% LTV Home Buying Guidelines
The new 3% down loan is similar to existing conventional loan programs. Rates are low and lenders who offer the program are widely available.
Many of today’s home buyers will meet guidelines for this new loan option. 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 $424,100
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 as their primary residence.
Today’s average home price is around $250,000 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.