Update for December 2014:
Fannie Mae and Freddie Mac have reinstated the 3% down conventional home loan as of December 2014. For details on the 97% LTV home buying program, click here.
For more information on how to refinance your home at 97% LTV, click here.
Below is more information on the details about the November 2013 minimum down payment increase that has now been repealed.
For years, Fannie Mae’s Conventional 97 mortgage, also called a MyCommunityMortgage® or MCM®, has offered first time home buyers a way to purchase with only 3% down. As of November 16, 2013, the down payment minimum has increased to 5%. Will it now be called the Conventional 95?
Prior to the change, this loan program came with even fewer financial roadblocks than even an FHA loan.
Whereas FHA requires 3.5% down, the Conventional 97 only required 3%. That’s a savings of $1,000 in down payment on a $200,000 loan.
Also, Conventional 97 loans had less expensive mortgage insurance. For someone with a 720 credit score, the mortgage insurance on a Conventional 97 would be $78 per month cheaper than with FHA.
Another advantage of the Conventional 97 loan is that it allows you to cancel your mortgage insurance when your loan amount decreases to 80% of your home’s value. FHA mortgage insurance never goes away, making the FHA loan program a lot more expensive.
As of November 16, 2013, all conventional loan program require 5% down. The change not only affects the Conventional 97, but the popular HomePath program as well. (Editor’s note: Fannie Mae ended their HomePath program on October 6, 2014. For more details, visit our Fannie Mae HomePath page.) The additional down payment is equal to $4,000 on a $200,000 loan compared to the 3% down previously required.
Why the change?
Historically, loans with high loan-to-value ratios – 95-97% of the purchase price – also have higher default rates. The less “skin in the game” a borrower has, the easier it is to walk away from the home and their down payment.
But as MetroTrends.org points out, default rates on high loan-to-value loans from 1999-2012 seem to be determined more by credit score than down payment percentage. A relatively large 10.9% of borrowers defaulted who had a credit score of under 700 and loan-to-value of 95 to 97%.
Only 4.8% of Fannie Mae loans with the same loan-to-value defaulted when lent to borrowers with credit scores between 700 and 750.
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Perhaps a better solution to help the Conventional 97 to stay alive would have been to impose a credit score minimum of 700 or 720.
Nonetheless, Fannie Mae will discontinue the 3% down program for all new home purchase transactions after November 16, 2013.
There is one caveat, however. Borrowers may still receive a 2% gift toward their down payment, and come up with 3% of their own funds. Fannie Mae will still consider this structure as meeting the 5% down payment requirement.
If a gift is not available, borrowers will now have to come up with a full 5% down payment, or choose an FHA, VA, or USDA loan.
Call (866) 240-5121 to talk to a lender about any of these loan programs.
*Per MGIC Rate finder on 11/8/2013.