A Conventional 97 loan is a conventional mortgage that lets you buy a home with just 3% down. The name comes from the 97% loan-to-value ratio: the lender finances 97% of the purchase price and you cover the remaining 3%. It follows underwriting rules set by Fannie Mae or Freddie Mac rather than a government agency, and it’s aimed at creditworthy buyers whose main obstacle to homeownership is coming up with a large down payment.
How the Loan Works
Unlike an FHA or VA mortgage, no federal agency insures a Conventional 97. Fannie Mae and Freddie Mac stand behind it through the secondary market: they set the guidelines, then purchase and securitize the loans lenders originate. That backing is what makes the 3% down payment possible while keeping interest rates in line with other conventional products.
Both agencies offer their own versions. Fannie Mae has a standard 97% LTV purchase loan and the HomeReady® mortgage. Freddie Mac offers HomeOne® and Home Possible®. The main differences involve income limits and homebuyer education requirements. HomeReady® and Home Possible® set income caps but sometimes price slightly better; the standard Fannie Mae 97% LTV loan and HomeOne® have no income limit at all.1Fannie Mae. FAQs – 97% LTV Options2Freddie Mac Single-Family. HomeOne3Fannie Mae. HomeReady Mortgage Loan and Borrower Eligibility4Freddie Mac Single-Family. Home Possible
The loan amount has to stay within the conforming loan limits set each year by the Federal Housing Finance Agency. For 2026, the baseline for a single-unit property is $832,750, and in designated high-cost areas the ceiling rises to $1,249,125.5Federal Housing Finance Agency. FHFA Announces Conforming Loan Limit Values for 2026 If the home you want exceeds the limit for your area, you’d need a jumbo loan, which typically requires a larger down payment.
This is a purchase product for a primary residence. Investment properties, second homes, and multi-unit properties don’t qualify. Fannie Mae does allow 97% LTV on a limited cash-out refinance in narrow circumstances (the existing loan must already be owned by Fannie Mae, and the property must be a one-unit principal residence with a fixed-rate loan of up to 30 years), but the program is built around buyers, not refinancers.6Fannie Mae. Limited Cash-Out Refinance Transactions
Who Qualifies
First-Time Homebuyer Status
On most versions of the loan, at least one borrower has to be a first-time homebuyer, defined as someone who hasn’t held an ownership interest in any residential property during the three years before the purchase.7Fannie Mae. 97% Loan to Value Options A displaced homemaker or single parent whose only ownership was jointly with a former spouse also qualifies as a first-time buyer.8Fannie Mae. Loan Delivery Job Aids – First Time Homebuyer
One important exception: HomeReady® doesn’t require first-time buyer status, so repeat buyers can use it as long as they meet its income limits.1Fannie Mae. FAQs – 97% LTV Options
Credit Score
The minimum FICO score is 620. But your score does much more than clear the qualifying bar. It drives your interest rate, your mortgage insurance premium, and the loan-level price adjustments Fannie Mae and Freddie Mac charge. A 740 will get materially better pricing than a 620. More on that below.
Debt-to-Income Ratio
Your debt-to-income ratio is how much of your gross monthly income goes toward debt payments, including the proposed mortgage. When the loan is run through Fannie Mae’s Desktop Underwriter, the maximum allowable DTI is 50%.9Fannie Mae. Debt-to-Income Ratios Individual lenders often set stricter caps of 43% or 45%. If one lender turns you down on DTI, another following the same Fannie Mae guidelines may still approve you.
Homebuyer Education
If every borrower on the loan is a first-time buyer, at least one of you has to complete a homebuyer education course before closing. Fannie Mae’s free HomeView® course satisfies the requirement, as does any course from a HUD-approved housing counseling agency or a provider whose content aligns with National Industry Standards.10Fannie Mae. Homeownership Education Schedule it early. Leaving it to the last minute is a common cause of closing delays.
Which Properties Are Eligible
The home has to be a one-unit property you intend to live in as your primary residence. Eligible types include detached single-family homes, condominiums, planned unit developments, and co-ops. Standard manufactured homes are capped at 95% LTV under Fannie Mae’s guidelines, though properties meeting the MH Advantage® criteria can qualify at 97%.7Fannie Mae. 97% Loan to Value Options
An appraisal is required on every purchase. The appraiser confirms the home’s market value supports the LTV and checks for condition issues. A low appraisal is one of the most common deal-breakers at this LTV, because you have almost no room to make up the shortfall in cash.
Where the 3% Down Payment Can Come From
The full 3% can come from a gift. For a one-unit principal residence, Fannie Mae doesn’t require any minimum borrower contribution from your own funds.11Fannie Mae. Personal Gifts A family member, domestic partner, or other eligible donor can cover the entire down payment and even the closing costs. Grants from employer-assisted housing programs and down payment assistance programs also qualify.
Documentation is what makes it work. Your lender will want bank statements showing the funds and a signed gift letter confirming there’s no repayment expected. If you’re using your own savings, plan on providing two to three months of statements. Unexplained large deposits will trigger questions.
Private Mortgage Insurance and How to Cancel It
Any conventional mortgage with less than 20% down requires private mortgage insurance. On a Conventional 97, PMI is unavoidable at origination. It protects the lender if you default and does nothing for you directly. The advantage over FHA is that you can get rid of it.
PMI is usually paid as a monthly premium added to your mortgage payment. Annual premiums generally run from about 0.46% to 1.50% of the original loan amount, driven mainly by your credit score and LTV. On a $350,000 loan, that’s roughly $135 to $440 per month. A borrower with a 760+ score might land near 0.46%; someone at the 620 floor could see closer to 1.50%.
Under the federal Homeowners Protection Act, you can request PMI cancellation once your loan balance reaches 80% of the home’s original value based on the amortization schedule, or sooner if extra payments get you there ahead of schedule. The request has to be in writing, your payments have to be current with a good history, and there can be no junior liens.12Consumer Financial Protection Bureau. When Can I Remove Private Mortgage Insurance PMI From My Loan
Even if you never ask, your servicer must automatically terminate PMI when the balance is scheduled to hit 78% of the original value, as long as your payments are current.12Consumer Financial Protection Bureau. When Can I Remove Private Mortgage Insurance PMI From My Loan
There’s a faster path if your home has appreciated. You can pay for a new appraisal yourself, and if it shows the current LTV has dropped to 80% or below, you can request early cancellation based on the new value. In a strong market, this can eliminate PMI years ahead of schedule.
How Your Credit Score Drives the Cost
Beyond the interest rate and PMI, Fannie Mae and Freddie Mac charge loan-level price adjustments (LLPAs) based on your credit score and LTV. They’re one-time fees, usually rolled into a slightly higher rate. At 97% LTV, they escalate quickly as scores drop:13Fannie Mae. Loan-Level Price Adjustment Matrix
- 780+: 0.125%
- 760–779: 0.250%
- 740–759: 0.500%
- 720–739: 0.750%
- 700–719: 0.875%
- 680–699: 1.125%
- 660–679: 1.250%
- 640–659: 1.500%
- 639 or below: 1.750%
On a $350,000 loan, the gap between a 780 score and a 660 score is roughly $3,900 in upfront pricing. Convert that to a rate bump and you pay it every month for the life of the loan. Combined with the higher PMI premiums at lower scores, a 660 borrower pays dramatically more for the same house than a 760 borrower. If your score is in the low-to-mid 600s and you can realistically add 40 to 60 points in a few months, waiting may save you more than any first-time buyer incentive.
Conventional 97 vs. FHA
The FHA loan is the closest competitor, requiring a minimum 3.5% down payment.14U.S. Department of Housing and Urban Development (HUD). Helping Americans Loans The two programs look similar on paper, but the long-term costs diverge sharply depending on your credit and how long you keep the loan.
The biggest difference is mortgage insurance. Conventional PMI cancels at 80% LTV. FHA mortgage insurance works differently: if you put down less than 10%, the annual mortgage insurance premium stays on the loan for its entire term. The only way out is to refinance into a conventional loan.
FHA does accept lower credit scores, with a 580 minimum at 3.5% down and scores as low as 500 with 10% down.15National Association of REALTORS. FHA Loan Requirements Between 580 and 619, FHA is essentially your only low-down-payment option. But at 620 or above, the Conventional 97 often wins on total cost because of the cancellable PMI and typically lower insurance premiums for higher-credit borrowers.
Seller Concessions
Closing costs on a home purchase typically run about 1.5% to 6% of the price, depending on location and the specifics of the deal. On a Conventional 97, you can negotiate for the seller to cover some of them. For loans with an LTV above 90%, the maximum seller contribution is 3% of the lesser of the sale price or appraised value.16Fannie Mae. Interested Party Contributions IPCs
Concessions can be applied to prepaid taxes, homeowners insurance, title fees, and origination charges. They can’t be used toward the down payment or to meet reserve requirements.16Fannie Mae. Interested Party Contributions IPCs If a seller offers more than 3%, the excess gets treated as a price concession and the appraised value drops accordingly, which can push your LTV above the allowed maximum and sink the deal.
Applying and Closing
Start with pre-approval. A pre-approval letter tells sellers you’re a serious buyer with verified financing. The lender will pull your credit, review income and assets, and set a maximum loan amount. Shop multiple lenders at this stage. Rate and fee differences on the same 97% LTV product can be meaningful.
Once you have a signed purchase contract, you submit the full application: pay stubs, W-2s or tax returns, bank statements, and the executed purchase agreement. The lender orders the appraisal and sends your file through underwriting. Expect the underwriter to ask follow-up questions, especially about large deposits, job changes, or employment gaps.
After approval, the lender issues a Closing Disclosure that itemizes every cost, fee, and loan term. Federal rules require you to receive it at least three business days before closing so you can compare it against your original Loan Estimate.17Consumer Financial Protection Bureau. What Is a Closing Disclosure At closing, you sign the loan documents, the funds are disbursed, and title transfers. From signed contract to closing day, a typical Conventional 97 transaction takes 30 to 45 days.