The steep rise in mortgage rates since 2021 has made buying a home a far more financially daunting endeavor. Paired with this challenge is the undertaking of amassing a sizable down payment. However, there are options that make homeownership more accessible by only requiring a 3% down payment, significantly reducing the burden of entry.
An Overview of 3% Down Mortgage Offerings
For those who meet eligibility criteria, 3% down payment mortgage programs furnish a viable pathway to homeownership. Typically geared toward first-time buyers or people without recent homeownership, income thresholds also apply. But for qualified applicants, these reduced down payment choices break down barriers to home ownership.
Conventional 97 – The 3% Conventional Option
Known as the Conventional 97 or 97% LTV Standard, this program through Fannie Mae allows buyers to contribute just 3% as a down payment, securing 97% financing. The down payment funds can stem from personal savings, gifts, grants, or help from family or friends.
Eligibility necessitates being a first-time buyer or not having owned a home in the past three years. There are no income limits for this program. However, meeting conventional debt-to-income requirements and a minimum credit score of 620 is mandatory, along with completing a homebuyer course.
Additionally, the property must be a single-family home that will serve as the primary residence. The purchase price must fall within conforming limits, which stand at $726,200 in most areas for 2023.
Since the down payment is under 20%, private mortgage insurance (PMI) is required, with the premium based on credit score and 97% loan-to-value ratio. PMI can be stopped once 20% equity is reached, like all conventional loans.
HFA Preferred Conventional Loans
HFA Preferred conventional loans are available for buyers with low to moderate incomes. You must work directly with your state Housing Finance Agency (HFA) or an approved lender in their network. These loans can offer down payment help through the HFA. Grants from lenders are allowed in some cases. There is no first-time homebuyer requirement. Income limits are set by each HFA. Mortgage insurance is cancelable with restrictions. Qualified low-income borrowers can get reduced monthly mortgage insurance premiums.
Fannie Mae HomeReady – Income-Specific 3% Down
Aimed at those without a primary residence in the past three years, Fannie Mae’s HomeReady program is another choice. It necessitates PMI, first-time buyer education, and a minimum 620 credit score. Income must not surpass 80% of the area median.
HomeReady eligibility includes more than just first-time buyers, but income limits apply unless the property is in a designated area. An online tool can assess qualification. First-timers must complete homebuyer education.
PMI costs are lower with HomeReady. It offers benefits like earlier PMI cancellation at 80% loan-to-value, more flexible underwriting to factor in rental or boarder income, and gift-only down payments.
Freddie Mac HomePossible – 3% Down up to Income Caps
Similar to HomeReady, Freddie Mac’s HomePossible program allows 3% down with income up to 80% of area median. Eligible properties include single-family homes, units up to four, condos, co-ops, and certain manufactured housing. An income eligibility tool can be used to check qualification.
HomePossible gives a path to homeownership with a lower initial investment. It even permits non-occupant co-borrowers to help with the down payment on one-unit homes. Additionally, mortgage insurance can be removed once 20% equity is reached, reducing the monthly payment.
Freddie Mac HomeOne – First-Time Buyers with 3% Down
Another Freddie Mac 3% down fixed-rate program, HomeOne is for first-time buyers. It has no income or geographic constraints but requires PMI and homebuyer education. The program is limited to acquiring a one-unit primary residence, including condos.
More Low Down Payment Mortgage Options
Beyond the above, other low down payment choices exist:
- FHA loans allow 3.5% down with 580+ credit score, or 10% down with a 500+ score. But FHA borrowers pay mortgage insurance for the full loan term if under 20% down.
- USDA loans are for specific rural locales and VA loans are for service members, veterans, and surviving spouses. Neither has mortgage insurance but both come with fees.
Moving Forward with 3% Down
Incorporating 3% down mortgage programs can reduce the need to exhaust savings or endure prolonged saving for a down payment. Those looking to accelerate savings can benefit from high-yield accounts and automated transfers. When starting your home search, it’s wise to explore lenders for available down payment help programs and options matched to your specific eligibility.
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