Conventional 97 Loan Guide

Conventional 97 Loan

What is the Conventional 97 Loan Program?

Conventional 97 loans are a type of low down payment mortgage for first time home buyers. Borrowers only need to come up with a 3% down payment, which then creates a mortgage balance of 97% loan to value (LTV), hence “97” in the mortgage product’s name. This program is offered by Fannie Mae. A few things set this apart from other conventional 3% down programs.

First, a Conventional 97 is only for first time home buyers. Most folks hear the term first time home buyer and think it means a person who’s never owned a home. However, the program guidelines are a little more forgiving. Instead, the term refers to a borrower who has not owned a property in the last three years.

Second, the Conventional 97 does not require applicants to complete a pre-purchase home ownership education class. Some other low down conventional programs require taking an online course. 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.

Borrowers do not need perfect credit to qualify. Underwriting standards are fairly forgiving in order to compete with the always-popular FHA loan program. FHA purchase loans allow slightly lower borrower credit scores but in return, they require a slightly larger 3.5% down payment. When one underwriting requirement changes, it affects another part of the system. I always think of a see-saw. Pushing down one side changes the elevation of the other side. Among the myriad of loan programs, each with their specific guidelines, there will always be tradeoffs like this.

Conventional 97 Borrower Requirements

  • 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

Some low down payment mortgage programs exclude borrowers with higher household incomes. The Conventional 97 program is more focused on whether the borrower is a first time home buyer or not; there is no borrower income limit.

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 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 applies to big metro areas. Fannie Mae provides a search tool to find conventional loan limits by property address. Conventional 97 loan limits are as follows:

  • $453,100 in most counties
  • $679,650 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

One thing that reduces closing costs of the Conventional 97 mortgage over the FHA loan is that conventional loans do not require an upfront mortgage insurance premium (UFMIP).

Without UFMIP, you can expect lower closing costs than FHA loans. But that doesn't mean convention loans are necessarily cheaper. Conventional loans typically have a slightly higher (perhaps 0.25%) interest rate. So running the numbers to compare programs is advised. Variables -- like how long you plan to own the home -- can be factored. Number crunching is something your loan officer can do for you.

Like FHA Loans, ongoing mortgage insurance is required. Private Mortgage Insurance (PMI) is required for loans with more than 80% loan to value (80 LTV). Since this is a 3% down loan, far short of 80% LTV, this means the PMI would clearly be required. PMI is paid on a monthly basis as part of the overall mortgage payment.

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. Reserves are the cash on hand in your bank account when the loan transaction is complete. Reserves are a buffer.

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. The loan processor and underwriter will verify the source of funds. Credit score requirements typically increase 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 (must be 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. It looks shady.

Conventional 97 Loan Program FAQs

Do I have to be a first time home buyer?

Yes. But it’s important to understand the definition of a first time home buyer. The Conventional 97 program does not require that a borrower has never have owned a home. Instead, a first time borrower is defined as a person who has not owned a home in the last three years.

I’ve owned a home in the past. My spouse has never owned a home. Can we still qualify for a Conventional 97?

Yes! To qualify, one of the borrowers (co-borrower) must be a first time home buyer.

Can I get a Conventional 97 mortgage with an adjustable interest rate?

Program guidelines specify that only fixed-rate mortgages may be used. The rules also stipulate a maximum term of 30 years; no exotic 40-year mortgages allowed. The most common terms are 15 and 30-year mortgages.

Can I buy a property with a Conventional 97 mortgage and then rent it out?

That’s not allowed and you could be subject to some very unpleasant legal activity should you take that course. Investment properties are not eligible for this program.

Is there mortgage insurance on a Conventional 97 loan?

Conventional 97 loans require private mortgage insurance (PMI) until the loan-to-value (LTV) reaches 80%. There is no upfront mortgage insurance premium (UFMIP) at closing. Furthermore, there's no funding fee (like VA loans have).

When can I get out of paying private mortgage insurance (PMI)?

Two conditions must be met in order to get rid of PMI. First, private mortgage insurance can be removed when the loan to value (LTV) is less than 80%. Second, 12 months must have passed from when the loan initially closed. This provision is mostly applicable in hot markets with rapidly increasing home values.

Can the seller or my real estate agent gift some of the down payment?

No one outside of blood or by-marriage relatives may be a down payment donor. The program guidelines specifically exclude anyone with a financial interest in the transaction (sellers, real estate agents, etc.) A builder would also be excluded.

Can I buy a unit within a duplex with a Fannie Mae Conventional 97?

2-4 unit properties are not eligible under the program guidelines. Only single-family dwellings are allowed.

Can I use this loan program for a new construction home?

Conventional 97 program guidelines do not allow construction-to-permanent financing. Fannie Mae offers the HomeStyle renovation mortgage for remodeling an existing home, and a construction-to-permanent option as well.  

My credit score is 620. Will I qualify for the Conventional 97 mortgage program?

It's not very likely. You stand a better chance to qualify for an FHA loan where credit scores can go as low as 600. Conventional 97 applicants need a score of 680 or higher.

Can I use the Conventional 97 if am self-employed?

Yes, you can. If you are self-employed, you will need to provide 2-years worth of federal tax returns. The returns will be included in the loan file and evaluated during the underwriting phase.

How long does it take to get a Conventional 97 loan?

Underwriting and final approval take anywhere from 20 to 30 days. Being organized and providing all necessary documentation when the loan application is made will help expedite the mortgage loan process.

Can I use a Conventional 97 loan for a “cash out” refinance?

Standard limited cash-out refinances (LCORs) may be made if the existing mortgage is currently owned or securitized by Fannie Mae.

How do I know if Fannie Mae own has my mortgage?

Fannie Mae has a loan lookup tool on its website.

Isn’t the Conventional 97 the same loan program as Fannie Mae HomeReady?

While they are both 3% down loan programs, there are some distinct differences. HomeReady does not require that borrower is a first time home buyer. HomeReady loans are meant for low and moderate-income borrowers, thus there are household income limits. Applicants must take a pre-purchase homeownership education. There is no cash out option with HomeReady.

Here's a chart that compares the Conventional 97 to HomeReady.

Conventional 97 vs. HomeReady

Conventional 97 vs Homeready Loan

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