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Low Down Payment Mortgage Loan

Low Down 97% Loan

Fannie Mae has a Conventional 97 loan

What is a conventional 97 loan? Home mortgages have a variety of names but for the most part a mortgage loan of any sort is either conventional or non-conventional. For the sake of simplicity any conventional loan is not guaranteed by any government agency such as FHA, therefore a non-conventional would be a loan that is insured by a government agency, such as FHA or VA.  A home mortgage will be one or the other, but just because a loan is non-conventional it doesn’t make it a lesser product.  In fact recently a new home mortgage product has been made available called a conventional 97 loan.

Mortgage loan Requires only 3% down?

A conventional 97 loan are a type of low down payment mortgage for first time home buyers.  The minimum down payment is 3% thus creating a mortgage loan balance of 97% loan to value (LTV), therefore the name “97” loan. This program is offered by Fannie Mae and differs from other conventional products. A convention 97 is only for first-time home buyers.  FHA offers a loan with less stringent qualifying standards with 3.5% down and the borrower does not have to be a first time home buyer.  However, when most people hear or see the words first time home buyer they will think it means a person who has never owned a home before.The good news here is this loan product is much more forgiving and means the borrower may not have owned a property for the last three years.

Pre-purchase home ownership education

Many low down loan products require applicants to complete a pre-purchase home ownership education class. Some other low down conventional programs require taking an online course.  Some sate and regional programs include the educational requirement.  Although home owner education is becoming more common these days this Conventional 97 loan product does not.  Even some state and regional programs include the educational requirement. Home owner education is becoming more and more prevalent these days. But it’s not a part of the Conventional 97 program rules. Most conventional home mortgage products require excellent credit and a FICO score below 700 will often keep perspective borrowers away from a conventional loan.  However, underwriting standards for the 97 conventional loan are more forgiving, typically a FICO of 680 or better. This loan is designed to compete with the much more popular FHA Loan program.  An FHA mortgage loan will require 3.5% down payment and a minimum FICO score of 580.  However, very few lenders will make a loan to a borrower with a 580 FICO score usually requiring a minimum of 620.  At Gustan Cho Associates we do not require an additional overlay such as this and work with clients based on the minimum guidelines. There are a myriad of loan programs, each with their specific guidelines.

Conventional 97 Loan Guidelines

  • At least one of the borrowers must be a first time home buyer
  • 680 typical FICO score depending upon borrower’s financial profile
  • No income limit
  • 43% debt-to-income (DTI) ratio

Conventional loan programs will always have more stringent guidelines than FHA or VA loans but there are instances they are appropriate.  One is for a second home or vacation home, a borrower cannot obtain an FHA mortgage loan for either of these. Another advantage to a conventional mortgage loan is there is no maximum loan limit.  This 97 conventional loan would not be appropriate for any of the above mentioned but the product is designed with the first time home buyer in mind and there is no borrower income limit. This is crucial because many low down payment mortgage loan products exclude borrowers with higher household income. The Conventional 97 program takes into account how much of a borrower’s monthly income goes toward paying debts. This is because lenders want to make sure borrowers are not getting in over their head after they get a mortgage. This means all of your monthly debt payments, plus your expected mortgage payment, cannot exceed a certain portion (percentage) of your gross income. While your whole credit profile will be taken into consideration, your debt-to-income ratio (DTI) for the Conventional 97 program should not exceed 43%. This means all of your monthly debt payments, plus your expected mortgage payment, cannot exceed 43% of your gross income. Here’s the formula:

(Mortgage Payment + Monthly Debt) ÷ Gross Monthly Income x 100 = DTI

Conventional 97 Loan Limits

Loan limits are the maximum loan amount available to borrowers who wish to take out a mortgage. Loan limits are set by county (and sometimes at a more granular level). A price adjustment is made so that the maximum loan amount is reflects average home prices surrounding the property.

Borrowers get a little more headroom to the upside when buying in a big city than rural areas. So there are two core limits outlined below: the first one applies to most counties across the United States and second one is for big metro areas. Fannie Mae provides a search tool to find conventional loan limits by property address. Conventional 97 loan limits are as follows:

  • $417,000 in most counties
  • $625,000 in high-cost areas

Conventional 97 Loan Requirements

  • Fixed-rate mortgage
  • Term up to 30 years

Conventional 97 Property Requirements

  • One-unit (no duplexes, etc.)
  • Principal residence
  • Condos
  • Co-ops
  • Planned unit developments (PUDs)
  • Manufactured homes are not permitted

Mortgage Insurance

Mortgage insurance is required whenever the LTV does not meet 80%.  One difference with any conventional type mortgage is there is no upfront mortgage insurance premium (UFMIP).  This does impact the overall cost in favor of conventional over FHA as FHA does require UFMIP. This insurance is required and protects the lender in the event of foreclosure. Without the UFMIP, a conventional loan may have lower closing costs than FHA, but that does not mean conventional loans are necessarily cheaper.  Conventional loans typically have a higher interest rate.  Interest rates on conventional loan products are impacted  by the borrowers FICO score, whereas the interest rate on an FHA loan will be the same for perfect credit as well as the not so good credit score. Comparing the different loan programs is advised, such as how long you plan to own the home can be factored. Working the numbers is something your loan officer can do for you.  For this alone a Mortgage Loan Officer licensed under a Mortgage Broker can save you thousands over the term of a loan.


If the LTV is less than 80% both FHA and conventional loans will have ongoing insurance required.  For FHA the insurance is referred to as Mortgage insurance premium, (MIP) for any conventional loan private mortgage insurance (PMI) will be required.  PMI is paid on a monthly basis as part of the overall mortgage payment, just like MIP would be paid on an FHA loan.  The difference here is the FHA loan is government insured.

Source of Down Payment Funds

There are several ways to come up with the money required for the down payment, closing costs and any reserves. Lenders like to see reserves (cash on hand in your bank account when the loan transaction is closed).  These are buffer and reflect closing of a new home mortgage loan will not leave you penniless and start off in your new home cash strapped.  Re

Down payment gifts are common. They are allowed if they come from blood or by-marriage relatives.  Gifts may not come with any strings attached; there can be no expectation of repayment. A mortgage gift letter must be signed by both the borrower and donor which makes that exact declaration. All funds must be traceable in order to prove their origins and that there’s no funny business going on.  I often advise if it is a gift letter be prepared to show the bank statements of the donor.  Underwriters are much more at ease with good documentation. The loan processor and underwriter will verify the source of funds. Credit score requirements typically increase on any conventional loan when a borrower accepts mortgage gift money. FICO score requirements could go up from 680 to 740. Here are some acceptable sources of down payment funds:

  • Gift funds
  • Grants
  • Community Seconds
  • Cash-on-hand, seasoned
  • No minimum contribution from borrower’s own funds is required

The term seasoned funds refers to money that’s been in your bank account for three months or longer. That’s why bank statements are part of the documentation borrowers must provide when they apply for a loan. Underwriters don’t like to see “mystery money” suddenly showing up in one’s account.  If there is a large deposit into your account be prepared to show where it came from.  For example if the borrow pulled money out of 401K plan, be prepared to show the 401K plan and withdrawal transaction records.  If the borrower sold a vehicle, be prepared to show the Bill of Sale with both your signature and the car buyers signature and contact information.

The Larry Stepp Team at Gustan Cho Associates are available 7 days a week, holidays and weekends.


Larry Stepp     407-922-4755


The information contained on website is for informational purposes only and is not an advertisement for products offered by Loan Cabin or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates and do not reflect the policy of GCA, its officers, subsidiaries, parent, or affiliates.

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