97 LTV Conventional Versus FHA Loans

Comparison of 97 LTV Conventional Versus FHA Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide examines both the advantages and disadvantages of 97 LTV Conventional Versus FHA Loans. The primary hurdle for first-time home buyers is the down payment. In today’s economic landscape, where expenses like housing, food, gas, insurance, and family responsibilities are high, saving for a home becomes challenging. Despite being hardworking, many families struggle to need help to accumulate funds for a home purchase.

Mortgage agencies offer programs with low down payment options to make homeownership more accessible for middle-class Americans who lack funds for down payment and closing costs. Promoting homeownership is a shared goal of FHA, VA, USDA, Fannie Mae, and Freddie Mac. All of these organizations are committed to this goal.

Except for VA and USDA loan programs, nearly all residential loan programs mandate down payments and closing costs. FHA loans, for instance, necessitate a minimum down payment of 3.5% for a home purchase. Conversely, conventional loans require a slightly higher down payment of 5%.

What is a Conventional 97 Loan?

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A Conventional 97 loan is a mortgage program offered by Fannie Mae, one of the government-sponsored enterprises (GSEs) in the United States. It allows homebuyers to obtain a conventional mortgage with a loan-to-value (LTV) ratio of up to 97%, hence the name “Conventional 97.” This means borrowers can finance up to 97% of the home’s purchase price, leaving them with a down payment requirement of just 3%.

The objective of the Conventional 97 loan program is to enhance the availability of homeownership, especially for those who are buying a home for the first time or experiencing challenges in saving for a substantial down payment. This program requires only a 3% down payment, providing an alternative to FHA loans that require a minimum of 3.5%. Speak With Us for Conventional Loans with 3% down payment

Can You do 3% on a Conventional Loan?

Yes, you can obtain a conventional loan with a down payment as low as 3%. These are often called “Conventional 97” loans, indicating that borrowers can finance up to 97% of the home’s purchase price, leaving them with a 3% down payment requirement. This option provides homebuyers with limited funds for a down payment, an alternative to FHA loans.

However, eligibility for a Conventional 97 loan is subject to meeting specific criteria set by the lender, including credit score, income stability, and debt-to-income ratio.

Does Fannie Allow 97% LTV?

Yes, Fannie Mae does offer 97% LTV (Loan-to-Value) options through its conventional loan programs. Borrowers can secure up to 97% financing with 97 LTV Conventional loans, requiring only a 3% down payment. This program aims to make homeownership more accessible by reducing the upfront cash needed for a down payment, particularly for first-time homebuyers or those with limited funds for a large down payment.

To be eligible for these loans, borrowers must satisfy Fannie Mae’s specific criteria. These criteria include various factors, such as credit score, income stability, debt-to-income ratio, and other relevant factors that are evaluated during the loan application process.

Reducing Eligibility Requirements To Promote Home Ownership

HUD, Fannie Mae, Freddie Mac, the VA, and the USDA all aim to encourage homeownership. Since late 2013, lending guidelines have been relaxed across all loan programs. This has led to decreased credit score requirements and more lenient credit guidelines, particularly within FHA loan programs. Fannie Mae and Freddie Mac have reintroduced their 3% down payment home purchase program to compete with FHA and encourage first-time homebuyers.

The low down payment requirements will make a renter think twice about renewing their lease on a rental. This should make any renter consider home ownership. Why rent when I can buy?

Previously, HUD required a minimum down payment of 3.5% for a home purchase, while Fannie Mae and Freddie Mac mandated a 5% down payment. However, Fannie Mae and Freddie Mac have revived their 3% down payment conventional loan program, also known as the 97 LTV Conventional loan, to compete with FHA. The ensuing paragraphs will delve into the advantages of the 97 LTV conventional versus to FHA loans.

Benefits of 97 LTV Conventional Versus FHA Loans

There are many benefits to 97 LTV Conventional versus FHA loans. For home buyers limited with the down payment for a home purchase, the 97 LTV Conventional Versus FHA loans are better due to the 3.0% down payment requirement versus the 3.5% FHA loans. However, the home buyer needs to qualify for conventional guidelines.

Conventional loans have tougher eligibility requirements than FHA loans. The minimum credit score to qualify for a conventional loan is 620 versus 580 required for a 3.5% down payment FHA loan. The waiting period after bankruptcy for an FHA loan is two years Chapter 7 discharge date. 4-year waiting period for a conventional loan

There is a three-year waiting period to qualify for an FHA loan after a deed-in-lieu of foreclosure and short sale versus a four-year waiting for conventional loans. There is a three-year waiting period to qualify for an FHA loan after the recorded date of foreclosure versus a seven-year waiting period after a standard foreclosure for conventional loans.

Eligibility Requirements on 97 LTV Conventional Versus FHA Loans

97 LTV Conventional Versus FHA Loans

For those home buyers with good credit and higher credit scores and no prior bankruptcy, foreclosure, deed-in-lieu of foreclosure, short sale, and lower debt-to-income ratios, the 97% LTV Conventional loan program will be the better choice. Maximum debt-to-income ratio requirements for conventional loans are capped at 50%.

The FHA loan program will be better for home buyers with lower credit scores, higher debt-to-income ratios, and credit issues. Maximum debt to income ratio caps on FHA loans is capped at 46.9% front end and 56.9% back end to get an approve/eligible per automated underwriting system. Click here to get eligible for conventional loans on 97LTV

Mortgage Insurance on 97 LTV Conventional Versus FHA Loans

Mortgage insurance is mandatory for FHA loans. HUD requires two types of mortgage insurance premiums. One of the main benefits of 97 LTV Conventional versus FHA loans is no upfront mortgage insurance. HUD requires upfront mortgage insurance, which is 1.75% of the loan balance normally added to the loan balance.

HUD recently lowered the annual mortgage insurance premium to 0.55% on FHA loans from 0.85%.  Depending on the borrower’s credit scores, the FHA annual mortgage insurance premium is often lower than private mortgage insurance on conventional loans.

HUD also has a lifetime FHA annual mortgage insurance premium of 0.55% on 30-year fixed-rate FHA loans that cannot be canceled. There is no upfront mortgage insurance premium for conventional loans. Private mortgage insurance is required for borrowers with higher than 80% loan to value. Private mortgage insurance can be canceled with conventional loans, and the homeowner has 20% or more equity.

What is the Highest LTV for a FHA Loan?

Borrowers can typically finance up to 96.5% of the home’s purchase price with an FHA loan while being required to provide a minimum down payment of 3.5% due to the maximum Loan-to-Value (LTV) ratio. This flexibility in down payment is a key feature of FHA loans, making homeownership more accessible to buyers with limited funds. Throughout the loan term, borrowers must pay mortgage insurance premiums (MIP), which adds to the overall cost.

Income-Based Repayment on Student Loans

Student loan debt is one of the biggest barriers mortgage borrowers face. Borrowers must go with FHA versus conventional loans due to high-balance student loans. HUD has a higher debt-to-income ratio cap versus conventional loans. Doctors, lawyers, and educators often have federal student loan debt that is over six figures.

The maximum debt-to-income ratio on FHA loans is 46.9% front-end and 56.9% back-end. Fannie Mae and Freddie Mac does not have a front-end debt-to-income ratio cap. The maximum debt-to-income ratio on conventional loans is 50% DTI.

HUD, Fannie Mae, and Freddie Mac require 0.50% of student loan balances to count as hypothetical monthly debt. 0.50% of $200,000 is $1,000 per month and automatically may disqualify borrowers’ FHA, and Conventional Loans allow Income-Based Repayment (IBR) that reports to credit bureaus to be used as monthly debt.

If the monthly debt does not report to credit bureaus, the lender can do a rapid rescore and credit supplement and report it to bureaus in 3 to 5 days. Borrowers with higher student loan balances may need to go FHA versus conventional loans.

Mortgage Included In Chapter 7 Bankruptcy

Another major benefit of 97 LTV Conventional versus FHA loans is borrowers with prior mortgages included in Chapter 7 Bankruptcy. Sometimes, borrowers must go with 97 LTV Conventional Versus FHA loans due to waiting period requirements. Conventional Guidelines state if borrowers had a mortgage included in Chapter 7 Bankruptcy, there is a four-year waiting period from the discharge date of Chapter 7.

The foreclosure, deed-in-lieu, or short sale date can be after discharge and does not matter. The housing event needs to be finalized. Borrowers cannot reaffirm the mortgage after the discharge of the 13. With FHA Loans, there is a three-year wait period to qualify for FHA Loans from the recorded date of the housing event after the Chapter 7 discharge date.

If you have any questions about the Comparison of 97 LTV Conventional Versus FHA Loans, borrowers who need to qualify for FHA loans with a lender with no overlays on government or conforming loans, please contact us at Gustan Cho Associates at 800-900-8569. Text us for a faster response. Or email us at alex@gustancho.com . The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays. Speak With Our Expert for Mortgage Loans

FAQ About Comparison of 97 LTV Conventional Versus FHA Loans

1. What is the primary challenge for first-time homebuyers addressed by these loan options? In today’s economic landscape, where expenses are high and saving for a home becomes challenging, the primary hurdle for first-time homebuyers is the down payment. Traditional 97 LTV and FHA loans aim to address this challenge by offering low down payment options.

2. What is a Conventional 97 Loan, and how does it work? A Conventional 97 loan, offered by Fannie Mae, allows homebuyers to obtain a mortgage with a loan-to-value (LTV) ratio of up to 97%, requiring only a 3% down payment. This program aims to enhance accessibility to homeownership, especially for first-time buyers or those struggling to save for a larger down payment.

3. Does Fannie Mae allow 97% LTV? Fannie Mae’s conventional loan programs provide 97% LTV options, allowing borrowers to finance up to 97% of the home’s purchase price while requiring only a 3% down payment.

4. What are the eligibility requirements for a Conventional 97 loan? Eligibility for a Conventional 97 loan is subject to meeting specific criteria the lender sets, including credit score, income stability, and debt-to-income ratio.

5. How does mortgage insurance differ between 97 LTV Conventional and FHA loans? FHA loans require mortgage insurance premiums (MIP) throughout the loan term. In contrast, 97 LTV Conventional loans may require private mortgage insurance (PMI), which can be canceled once the homeowner has 20% or more equity.

6. What is the highest LTV for an FHA loan? For an FHA loan, borrowers can finance up to 96.5% of the home’s purchase price. However, a minimum down payment of 3.5% is required to qualify.

7. How do income-based repayment plans for student loans impact loan eligibility? FHA and conventional loans have different guidelines regarding student loan debt and debt-to-income ratios, potentially affecting borrower eligibility.

8. Can a mortgage be included in Chapter 7 Bankruptcy, and how does it impact loan options? Borrowers with prior mortgages included in Chapter 7 Bankruptcy may have different waiting period requirements depending on the loan program, affecting their eligibility for 97 LTV Conventional versus FHA loans.

This blog about the Comparison of 97 LTV Conventional Versus FHA Loans was updated on March 18, 2024.

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