In late 2014, government-sponsored enterprises Fannie Mae and Freddie Mac announced new 3%-down conventional mortgage loan products designed to make homeownership accessible to otherwise qualified buyers who didn't have the cash available for a large down payment. Unfortunately, these loan products are still not well understood by many homebuyers, particularly the first-timers they are intended to help. Here's a rundown of the 3%-down conventional loan options, the qualification requirements, and some alternatives you might want to consider.
The 3%-down conventional mortgage
A few years ago, as the housing market's recovery was well underway, Fannie Mae and Freddie Mac both started offering to purchase mortgages with as little as 3% down.
Fannie Mae offers two versions of the 3%-down loan, and it's important for borrowers to know the difference. The standard 3%-down loan, known as the "Conventional 97," is available to first-time homebuyers, which is defined as at least one borrower hasn't owned a home within the past three years. There are no income restrictions, and pre-purchase homebuyer education is not a requirement.
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The HomeReady 3%-down option is available in certain low-income areas and have no first-time buyer restrictions. The process of obtaining a HomeReady loan is a bit more rigorous, as a pre-purchase homeownership course is required. However, the HomeReady offers certain features designed to make homeownership more accessible to lower-income buyers, such as the ability to use a non-occupant co-borrower's income for qualification purposes.
The Freddie Mac version of the 3%-down mortgage is called Home Possible Advantage, and has similar characteristics to the Fannie Mae program. These loan programs are offered by a variety of banks, some of which partner with Fannie Mae and some with Freddie Mac. Banks often have their own names for these loans, such as Wells Fargo's "yourFirstMortgage" product.
With all of these programs, it's important to point out that borrowers will be required to pay for private mortgage insurance, or PMI, at least until the loan-to-value ratio is paid down to 80%.
Credit qualifications
Fannie Mae's minimum qualifications call for a FICO credit score of at least 620 for a 3%-down mortgage. However, be aware that most people who are approved for conventional mortgages have credit scores in the 700s or better, and that it may be difficult to get approval with a score on the lower end. In fact, in a 2016 CNBC interview, Jonathan Lawless, vice president of product development at Fannie Mae, said that a borrower with a 620 score would be unlikely to qualify under Fannie Mae's lending standards.
In addition, banks that offer 3%-down conventional mortgages can set their own requirements, as long as they meet or exceed Fannie Mae's minimums. For example, JPMorgan Chase rolled out a 3%-down mortgage product in 2016 in partnership with Fannie Mae, which requires a minimum score of 680. And Freddie Mac's Home Possible Advantage guidelines mandate a minimum 660 credit score for purchase transactions.
The bottom line is that while it's technically possible to qualify for a 3%-down conventional mortgage with a credit score as low as 620, it's not likely to happen unless you have an extremely high income or some other factor that offsets your score in the eyes of an underwriter.
The ideal borrower would have a high credit score, an income that more than justifies the loan, a long, stable employment history, and enough reserves to cover several months of mortgage payments. Obviously, that doesn't describe everyone, so underwriters will consider all of these factors in their decision.
Other requirements
In addition to the credit and income qualifications, the 3%-down conventional mortgages have a few additional requirements:
- The property must be a single-unit principal residence. Condos and co-ops are fine, but you can't buy more than one housing unit, like an entire duplex.
- The loan must be a fixed-rate mortgage.
- You must plan to live in the home you're buying.
- The loan's term can be a maximum of 30 years.
- Participants in the HomeReady 3%-down program must complete a homebuyer education course.
- The loan's amount meets the Fannie Mae/Freddie Mac conforming loan limit for single-unit homes, currently $424,100 for most areas.
Alternative loan options
If you don't have a lot of money to put down on a home, there are a few other lending programs you may want to consider.
The FHA loan program can be a good alternative if you can't get approved for the conventional 3%-down program. FHA loans have much looser credit requirements, and it's entirely possible to get an FHA loan with a credit score in the upper 500s. On the downside, you'll have a slightly higher down payment of 3.5% and your mortgage insurance will likely be more expensive and tougher to get rid of.
For veterans, VA loans offer 0%-down financing and have no mortgage insurance requirement, so these are worth a look if one of the buyers served in the Armed Forces. USDA loans are another 100% financing option, available to qualified homebuyers in certain rural areas.
Finally, some lenders have their own programs that may be an option for you. For example, Regions Financial offers a 100% financing program for high-credit borrowers. It might be a smart idea to check with some local banks and credit unions to see what they offer.
The best way to see if you qualify
Unfortunately, I can't give a definitive answer to whether or not you qualify for a 3%-down conventional mortgage. Between your credit, employment situation, and other variables, there's a lot that is considered in the underwriting process. So, the most accurate way to see if you qualify is to talk to a lender (or several) and apply for a preapproval.
