What is a Conventional 97 Loan?

You may have heard that if you want to buy a house, you need a 20% down payment. You may fear that without this lump sum, there's no way you'll be able to get a house in a competitive homebuying market. Don't be discouraged; there are other ways to make your dream of becoming a homeowner a reality.

According to the Federal National Mortgage Association, also known as Fannie Mae, the biggest challenge for first-time homebuyers is saving enough money for the down payment. There is a special type of mortgage loan designed to help overcome this obstacle: the Conventional 97 Loan, or as Fannie Mae calls it, the Standard 97 Percent Loan-to-Value Mortgage.^{See note1}

What is a Conventional 97 Loan?

It's among the lowest of the low-down-payment mortgage options. As with all loans, the terms and requirements vary by product and lender. Here are some of the basics about this loan:

• Buyers put 3% down and finance the other 97% of the loan — hence the name.
• It's a fixed-rate mortgage loan. The monthly payment remains the same for the duration of the loan.
• Private mortgage insurance, or PMI, is required until 80% of the original value of the home is paid.
• It's geared toward first-time homebuyers in any income bracket.

Who's considered a first-time homebuyer?

When you hear the term "first-time homebuyer," you may picture an early-career professional or perhaps a newly married couple. But the working definition is much broader when it comes to a Conventional 97 Loan.

Applicants are considered first-time homebuyers if:

• At least one borrower is a first-time homebuyer, or
• At least one borrower hasn't owned a residential property for at least three years prior.

Consider this scenario. A person bought a house 10 years ago and sold it after five years. They spent the last five years renting an apartment. This person could be considered a first-time homebuyer again.

Here's another scenario. Two people intend to be co-borrowers on a loan.

One of them owns a residence. The other borrower doesn't own property, and hasn't owned any for at least three years. This pair could still qualify as first-time homebuyers. Contact your lender for additional details and requirements or to discuss your specific situation.

Qualifications for a Conventional 97 Loan

In addition to first-time homebuyer status, other qualifications for a conventional 97 loan include:

• Loan amounts. Minimum and maximum loan amounts may apply. A loan officer can help you decide what amount best serves your needs.
• Minimum credit score. Government-sponsored enterprises, such as Fannie Mae, require a credit score of 620 or higher. Some lenders may require a higher credit score. Contact your lender to learn more about their program and requirements.
• Debt-to-income ratio. Lenders compare your monthly obligations to your gross monthly income. They want to see how much of your income is already spent on bills like auto or credit card payments. This is one measure of your ability to complete the monthly payments for the loan amount you plan to borrow.
• Proof of financial responsibility. Lenders will review your existing income and assets. They'll conduct a credit check to determine whether you would be borrowing within your financial means.
• Down payment sources. You may be able to fund your down payment through sources outside your own savings. Gifts, grants and down payment assistance programs may qualify. Check with your loan officer about what your lender will or won't accept.
• Occupancy. The home must be the buyer's primary residence.
• Property type. Eligible properties include single-family homes of one to four units, condominiums and planned unit developments, or PUDs. Manufactured homes aren't eligible. Check with your loan officer about specific property type eligibility.
• First-time homebuyers course. Government-sponsored enterprises, such as Fannie Mae, require that first-time homebuyers participate in homeownership education courses or counseling from a qualified provider. Your loan officer will be able to provide more direction.

What are the pros and cons of a Conventional 97 Loan?

At this point, you know its basic features and you have an idea of the necessary requirements to qualify for one. Now consider how this information translates into pros and cons.

Pro: Buy a home sooner.

The conventional 97 loan can help you move into your own home faster. The low 3% down payment means you spend less time saving up before you can buy.

Pro: Meet other savings goals.

That low down payment also lets you to build more savings for other uses like moving expenses. You might start a savings account for future home renovations. Or, if you haven't done so already, you could start an emergency fund.

Pro: The qualification may be a better fit.

The requirements for a conventional 97 loan may be less constraining compared to other types of mortgage loans. For example, there are occupancy deadlines and limitations related to the condition of the house for a Veterans Administration loan.

Con: Monthly payments may be higher.

The conventional 97 loan requires that you pay Private Mortgage Insurance, or PMI, until 80% of the original home value is paid. PMI premiums may be added to your monthly mortgage payment. This can result in a higher total monthly payment than if you made a larger down payment. You may be able to pay all of your PMI up-front at the time of closing on the loan. Ask your lender about your available options.

The Conventional 97 Loan does effectively reduce one major obstacle to home ownership – the down payment. But that could come with the tradeoff of a higher monthly payment. And this might be a significant challenge, especially if it makes a big impact on how much money you're able to save after your monthly bills are paid. You're not alone. Consult with your financial services provider for guidance on your goals as you budget for that new home.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.