First time buyer mortgages with 3% down offer many advantages compared to traditional loan options. One reason to consider first time buyer mortgages is the lower down payment requirements. Another is that it may open the door to homeownership sooner than other loan programs. So, what else should you know when it comes to these mortgage loans?

Here are the key facts you need to know about the Fannie Mae Standard 97% LTV, a first time buyer mortgage requiring just 3% down payment.

Must I be a first time buyer?

Yes, you must be a first time buyer.  A “first time buyer,” according to the definition, is someone who has not  owned residential property in the past three years.   As a result, this opens to door for many potential home buyers who have not owned a home recently.

Another Fannie Mae loan product, named HomeReady 97% LTV, does not list a first time buyer requirement.  We’ll cover that mortgage in our next post. For now just note that it has limitations that may render it unavailable to many first time buyers.

Which property types are eligible?

Properties purchased with this first time buyer mortgage must be one-unit primary residences. This means they cannot be multi-unit properties, second homes or investment properties.

Detached single family homes, condos, co-ops, and planned unit developments (PUDs) are typical.  A PUDs is a development of homes (attached or detached) where a monthly association fee is paid to manage common areas.

Is there a minimum credit score?

The minimum credit score for this first time buyer mortgage is 620. Fannie Mae states this explicitly in their guidelines. Many lenders prefer to see higher credit scores and may impose their own guidelines for this program.  A down payment including gift funds will usually require a higher credit score.

Does better credit lower my interest rate?

Conventional mortgages, including this first time buyer mortgage, use “risk-based pricing.”  This is a fancy term for the process of increasing the mortgage interest rate as the credit score or other factors worsen.

Credit scores are usually placed into “buckets.” Any borrowers with credit scores between 680 and 699 will be placed into the same bucket. For this reason, drastically improving credit scores can be valuable while small movements may make little difference.

Which loan terms are available?

A 30-year term is the only term available. Adjustable rate mortgages or interest only mortgages are not available for this loan program.

Having a fixed rate is advantageous for many reasons.  Most importantly, a fixed rate ensures each payment is predictable.  Even more, a fixed rate ensures that future rate changes will not impact the monthly mortgage payment.

Where can the down payment come from?

Down payments for this mortgage can come from the borrower’s funds or from a gift.  Usually, seasoned funds are required when coming from the borrower’s checking or savings account.

Similar to FHA mortgages, gift funds can also be used for the down payment and closing costs. The funds gifted must be from a blood relative and there can be no expectation of repayment.  In this sense, it is a true “gift” and a letter is usually included within the file stating as such.

Do I need mortgage insurance for this loan?

The Conventional 97 first time buyer mortgage does not have an up-front mortgage insurance requirement. This differentiates it from it’s rival, the FHA 3.5% down payment loan.

Similar to the low down payment FHA mortgage, the Conventional 97 does require monthly mortgage insurance.  Risk factors (just like interest rate) will determine the amount of mortgage insurance.  Lower credit scores will require a higher monthly mortgage insurance payment.

Do I need first time buyer education to qualify?

This first time buyer mortgage with 3% down may require homeownership education – and it is usually provided free and online! 

So, there you have it! All the details you need to know about the Conventional 97.

What else should I consider as a first time buyer?

A low down payment mortgage can be advantageous for several reasons. Making a decision on just one fact, however, may not set you up for financial success. There are several important considerations worth noting before making a decision about your first time buyer mortgage. So, let’s take a look at three:

First, a low down payment mortgage requires a higher payment each month. The higher payment is required because your starting mortgage balance is higher.  Due to this, you’ll have less monthly cash flow for other things like savings, paying off student loans or vacations.  If extra cash flow could be important for you or a growing family, you may want to consider a larger down payment amount.

Second, a low down payment mortgage requires mortgage insurance.  Mortgage insurance can be expensive and may not be tax deductible.  Changes in the tax code can happen quickly, and these changes may make it more or less beneficial to have mortgage insurance. Therefore, assuming tax deductibility could be risky.

Lastly, it may be important to consider opportunity cost.  Opportunity cost is what you are giving up when you use funds for a larger down payment.  For example, if you had a crystal ball and could predict stock gains with perfect accuracy, you may elect to put as little down as possible. This way, you could invest all your cash and see huge financial gains!

Above all else, consider your individual circumstances when it comes to your first time buyer mortgage.

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