In 2014, Fannie Mae and Freddie Mac (federally-sponsored home mortgage enterprises formed by the U.S. Congress) announced a 3 percent down conventional mortgage loan product that was created to make it easy for more people to become homeowners.
Those who previously wouldn’t qualify or those who don’t have the necessary amount of cash for a huge down payment can now own a home.
Unfortunately, many home buyers still don’t understand such loan products very well — especially the first time owners that they were intended for.
Here, we’ll discuss everything you need to know about the 3 percent down conventional loan, and how it can help you get your own home.
The minimal qualifications set forth by Fannie Mae is a credit score with FICO of 620 to be approved for a 3 percent down mortgage.
Be aware, however, that most candidates that get approved for a conventional mortgage have a credit score of 700 or higher, and that those who are in the lower end may find it harder to get approved.
Additionally, banks that provided the 3 percent down option can have their own set of requirements, given that they meet the minimums provided by Fannie Mae.
An example of this can be found from JPMorgan Chase when they rolled out their 3 percent down mortgage option with Fannie Mae as their partner, where they required 680 as the minimum score.
Furthermore, the Home Possible Advantage option from Freddie Mac requires a minimum score of 660 with purchase transactions.
Our main takeaway is that even if you can technically apply for a 3 percent down conventional mortgage using a low credit score such as 620, this probably won’t pass the standards unless you can offset the score to the underwriter’s eyes with an incredibly high income.
An ideal borrower will have income that answers for the loan, a high credit score, enough savings to cover for your first few mortgage payments, and a stable, long employment history.
Apart from the income and credit qualifications, 3 percent down conventional mortgages also have other requirements such as:
Some years ago, the housing market made a slow but steady recovery, so Fannie Mae and Freddie Mac both offered a way to purchase mortgages with only 3% down. Fannie Mae is known to offer two versions of 3 percent down loan, so here’s the difference between the two:
The Freddie Mac option of the 3 percent down mortgage is known as the Home Possible Advantage and has similarities to its counterpart from Fannie Mae.
Furthermore, such loan programs are also offered by a selection of banks, some of which are partners with Fannie Mae and others with Freddie Mac. Banks will also give their names for the 3 percent down loan, such as “YourFirstMortgage” by Wells Fargo.
Even with all the loan programs, however, it’s still important to know that borrowed will need to pay for PMI (private mortgage insurance) until the loan-to-value ratio is paid up to 80%.
Fortunately, the standard 3 percent down program doesn’t have a set limit on your income. The HomeReady 97% loan, however, requires the borrower to be below or at 80% of the area’s average income.
Yes. The Conventional 97 program is a 3% down payment program and is available from Freddie Mac and Fannie Mae. For many homeowners, this is a less-expensive option compared to an FHA loan, making it the smarter choice.
Also, the Conventional 97 mortgage lets borrowers take the entire 3% down payment to come in the form of gifted funds, so you can get it from anyone related by marriage or blood, or through a domestic partnership, a legal guardianship, or from a fiancée/fiancé.
Because of the achievable requirements and very low down payments, conventional loans have become very popular.
However, there is a big difference in how many borrowers put as their initial down payment.
Thanks to their low rates and wide availability, taking out a conventional loan is the most popular mortgage option in the country. Nearly 3 in 5 buyers will opt for a conventional loan whenever they want to refinance or buy a house.
In the end, homebuyers need to check their options for a conventional mortgage with at least three different lenders.
The rates today are pretty low, and may even get lower using the right shopping practices.
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