As a first-time homebuyer, you may not have the financial resources to cover a large down payment on a new home. As such, you might be searching for a mortgage product which can provide you with the lowest down payment available.
Many first-time homebuyers consider FHA loans for this reason. With a mortgage backed by the Federal Housing Administration (FHA), your down payment could be only 3.5%.
Conventional Loan Tips in Florence, AL
But are you familiar with the Conventional 97% LTV Program from Fannie Mae and Freddie Mac?
With this program, it is possible to purchase a new home while putting just 3% down.
That opens the door to many more possibilities when you are applying for a home loan as a first-time buyer (or as a repeat buyer who simply cannot afford a high down payment).
Even though the FHA mortgage program has quite a few advantages, here are a couple reasons to consider applying for a conventional loan instead through the 97% LTV program:
- You can get an even lower down payment with a conventional mortgage now than you can within FHA mortgage.
- The fees that you need to pay upfront for a conventional loan may be lower than those which would be required with an FHA home loan.
- You will be required to purchase private mortgage insurance (PMI) with a 3% conventional loan as you would be with an FHA loan. But the good news is that it is not necessarily a permanent feature. If you want to quit paying it with an FHA loan, you must eventually refinance. With the conventional loan, you may not have to do this.
Who Qualifies for a 3% Down Conventional Home Loan?
You might think that it is more difficult to qualify for a conventional home loan then it would be for an FHA home loan as a first-time homebuyer. But this is not necessarily true.
- The minimum credit score to qualify for 3% down with a conventional mortgage is 620 going by the Loan Level Price Adjustment (LLPA) chart provided by Fannie Mae. It is true that this is higher than the 580 score that you need to qualify for a 3.5% down payment on an FHA mortgage, but it is not much higher.
- It is expected that your debt-to-income ratio be around 43% or lower.
- You will need to opt for a fixed rate mortgage rather than an adjustable rate mortgage to be eligible for this program.
- You can only use a 3% down conventional loan to finance the purchase of a primary residence. The structure must be a one-unit single-family home, condo, co-op or PUD.
- The property must not exceed the cap for conventional financing (otherwise, you must use a jumbo loan).
- One borrower on the mortgage at a minimum cannot have previously owned a home anytime in the most recent three years.
Are Interest Rates High on a Conventional 3% Down Mortgage?
You might think that there must be a catch in terms of interest rates on a 3% down conventional mortgage. Mortgage rates for 3% down conventional home loans tend to be almost in line with what you would pay with a 20% down conventional home loan.
This is generally is because you are paying for private mortgage insurance with a 3% down loan, where as you probably would not be with a 20% down loan. Since this reduces the overall risk profile of the loan, lenders are willing to drop your interest rates accordingly.
How long do you need to pay for PMI for this type of mortgage? By default, once the balance of your mortgage drops to 78% of the total value for the home, this requirement goes away.
Let Us Help You Apply for an Affordable First Time Home Loan Today
With a low-down payment, you may be closer than you think you moving into your first home. Need help deciding whether to apply for a conventional mortgage with 3% down or an FHA loan with 3.5% down? Please give us a call at (205) 495-0313, and we can schedule your consultation.
We will help you figure out what the most affordable and flexible option for your needs is and prequalify you so that you can shop for a home now.