3 percent down mortgages: A guide to your options

With mortgage interest rates more than double their 2021 levels, purchasing a home is a pricey proposition nowadays — and saving for a down payment is no walk in the park either. But the good news is you don’t always have to come to the table with a down payment that’s the proverbial one-fifth (20 percent) of the purchase price. Some loan programs only require you to come up with 3 percent in cash. That can make the road to homeownership a lot smoother.

Here’s a guide to these 3 percent down mortgages: how they work and what you need to know.

3 percent down mortgage options

Mortgages that only require a 3 percent down payment are often part of a special program, and they’re open to anyone who meets the program requirements. Typically, you must be a first-time homebuyer or not have owned a home over the past few years to qualify; generally, you must also meet the program’s income limits.

1. Conventional 97

Backed by Fannie Mae, the Conventional 97 mortgage program, sometimes referred to as 97 Percent LTV option, allows you to put just 3 percent down and finance 97 percent of the home (get the name now?).

The down payment doesn’t have to come from your savings — the funds can be a gift from a friend or relative, grant or other form of assistance. However, there are certain qualifications that must be met to obtain this mortgage, including:

• First-time homebuyer: At least one of the loan applicants must be a first-time homebuyer or not have owned a home in the past three years.
• Homeownership education course: If all the occupying homebuyers are first-time buyers, at least one applicant must complete a homebuyer education course.
• Debt-to-ratio (DTI )and credit score: Must meet conventional DTI requirements and have a credit score of 620 or higher.
• Residential requirements: The home you’re buying must be your primary residence, meaning you intend to live in it.
• Conforming loan limitations: The purchase price of the home cannot exceed current conforming loan limits, which for 2024 is $766,550 for a one-unit property in most parts of the country; in more expensive areas, the loan limit is $1,149,825.

Don’t be put off by this list: “The underwriting guidelines are no more stringent than for any other conventional 30-year mortgage,” says Dan Green, president of Cincinnati-based mortgage company Homebuyer.com.

Because you’re putting less than 20 percent down on the home, however, you’ll also need to pay private mortgage insurance (PMI) with your monthly mortgage payment. Your premium will be based on your loan-to-value (LTV) ratio — in this case, 97 percent — and credit score. Once you have 20 percent equity in your home, you can stop paying PMI. Again, this rule applies to any conventional loan program.

Conventional 97 mortgages are offered by a variety of lenders, including banks, credit unions and online lenders. If you’re interested in this type of mortgage, start by researching lenders on the web — just type “conventional 97 mortgage” into your search engine. Mortgage brokers may have a line on them too.

2. Fannie Mae’s HomeReady program

Also backed by Fannie Mae, the HomeReady program lets you use financing to buy a more varied array of properties, including a single-family home, a residential building with up to four units or a condo. The eligibility requirements for HomeReady include:

• Previous homeownership limits: Open to applicants who have not owned a primary residence during the past three years.
• Homeownership education course: Applicants who are first-time buyers must take a homeowner education course.
• Credit score: Applicants must have a minimum credit score of 620.
• Income requirements: Applicant’s income cannot exceed 80 percent of the area’s median income.
• Residential requirements: Can be a multi-family building, but at least one unit must be owner’s primary residence.

The HomeReady program also includes more flexible underwriting requirements that allow you to count rental income toward your income requirements. In addition, while a 3 percent down payment is standard, you’re actually not required to dig into your own pockets at all with this mortgage: 100 percent of your contribution can come from money received as gifts and down payment assistance.

Similar to the Conventional 97 program, Fannie Mae HomeReady mortgages are offered by a variety of private lenders. You do not apply directly to Fannie Mae. You can find lenders offering this mortgage with a simple internet search.

3. Freddie Mac’s Home Possible program

Similar to Fannie Mae’s HomeReady program, Freddie Mac’s Home Possible program has similar terms. One big distinction: It allows non-occupying co-borrowers to contribute funds to the 3% down payment for one-unit properties. Some of the requirements for Home Possible include:

• Homeownership education course: First-time homebuyers must participate in homeownership education.
• Credit score:  Applicants must have a credit score of 660.
• Income limits: Applicant income cannot exceed 80 percent of the area’s median income.
• Private mortgage insurance: Must pay PMI premiums.
• Residential requirements: Must live in the home as your primary residence.

In addition to the program features listed above, once you reach 20 percent equity in the home, you can eliminate mortgage insurance, which reduces your monthly mortgage payment.

Home Possible mortgages are not available directly from FreddieMac. You’ll need to shop around to find lenders who participate in this program. Because of the income limits associated with Home Possible mortgages, they are not as widely available as some other types of mortgage programs.

4. HomeOne

Freddie Mac also backs the HomeOne program. These mortgages are designed both for applicants who have limited down payment funds for a home purchase and for homeowners interested in a cash-out refinance. Requirements to obtain a HomeOne mortgage include:

• First-time homebuyer: At least one of the applicants must be a first-timer: never have owned a home before, or at least for the last three years.
• Credit score: At least one applicant must have what Freddie Mac deems a usable credit score —meaning a score that’s based on enough history to determine that the individual has a track record of being a responsible borrower, or an “acceptable credit reputation,” as Freddie Mac guidelines put it.
• Homeownership education course: If all borrowers involved in the purchase are first-time buyers, a homebuyer education course is required.
• Residential requirements: All borrowers must occupy the home as their primary residence.
• Eligible homes: HomeOne can only be used to purchase single-unit properties, which can include townhouses or condos. It cannot be used to buy manufactured homes.

Unlike other 3 percent down mortgage programs, there are no income limits associated with the HomeOne loan. There are no geographic or location limitations for this program either.

Those making a small down payment are required to pay for private mortgage insurance: The program requires PMI with mortgages that have an LTV of over 95 percent. As with the other programs, the mortgage insurance may be canceled once the homeowner has built up a 20 percent equity stake in the home.

Similar to the other mortgage programs, HomeOne is not available directly from Freddie Mac. Instead, you’ll need to research and find a private lender offering it (typically one that participates in Freddie Mac programs).

Other low-down payment options

Beyond the Fannie Mae and Freddie Mac mortgage programs featuring 3 percent down payments, there are other types of mortgages that allow prospective home buyers to access homeownership with a low down payment. The options include:

• FHA loans – Insured by the Federal Housing Administration (FHA), FHA loans allow borrowers to put down just 3.5 percent with a credit score of 580 or higher, or at least 10 percent with a score as low as 500. However, FHA borrowers with less than 20 percent down must pay FHA mortgage insurance premiums (MIP) for the life of the loan — in most cases, it can’t be removed like as conventional loan private mortgage insurance can. “The FHA is a catch-all, serving homebuyers who are not eligible for the other programs,” says Green. “It’s purposefully inclusive and tries to support as many homeowners as possible. You don’t need to be low- or moderate-income to qualify.”
• USDA and VA loans – USDA and VA loans don’t require any down payment, but they’re only for specific types of borrowers: USDA loans for borrowers in certain rural areas and VA loans for active-duty service members, veterans and surviving spouses. Neither charge mortgage insurance, but USDA loans come with guarantee fees and VA loans come with a funding fee.

Next steps to get a mortgage

With 3 percent down mortgage options, you don’t need to crack open your nest egg or save for years to buy a home. However, if you want to accelerate your down payment savings efforts, consider using high-yield savings accounts or money market accounts, and setting up auto-deposits from your checking account or paycheck.

Once you’re ready to start house hunting, shop around for mortgage lenders to discuss down payment assistance programs and what you might qualify for, to find the best loan at the least out-of-pocket cost to you.

FAQ about 3 percent down mortgages

• What are the drawbacks of a 3% down mortgage?

  While a 3 percent down mortgage can make homeownership more accessible, it carries a few drawbacks. Because you’ll be providing a deposit of less than 20 percent, lenders will require that you pay for private mortgage insurance, which increases the monthly mortgage payments. In addition, with a smaller down payment, you’ll be starting out with less equity in the home. You’ll also be borrowing a greater amount of money, meaning you’ll have a bigger debt to repay. A more substantial debt will likely take longer to repay and cost you more in interest.

• What’s a typical down payment amount?

  The typical down payment for homes, among both first-time and repeat home buyers, has reached a record high. First-time home buyers are coming to the table with about 8 percent, while repeat buyers are making down payments of about 19 percent, according to the National Association of Realtors “2023 Profile of Home Buyers and Sellers” report. In its “2024 Home Buyers and Sellers Generational Trends” report,  the National Association of Realtors (NAR) found the median down payment among all buyers (some 6,817 new homeowners) to be 15 percent. In May 2024, the average down payment amount was $60,202, which is a 20 percent year-over-year increase, according to real estate data provider ATTOM.

• How can the size of the down payment affect other housing costs?

  When you have a smaller down payment for a home, you’re likely to pay more in fees and interest. Conversely, with a larger down payment, you’re likely to qualify for a more competitive interest rate on a mortgage, which saves you money on monthly mortgage payments. In addition, a larger down payment means you are borrowing less, which also makes your monthly mortgage payment smaller.The size of your down payment also affects whether or not you’ll be required to pay private mortgage insurance. When you do, it also drives up your monthly mortgage cost, as a small fee that’s tacked onto each payment, along with the principal and interest.