The lowest down payment on a conventional loan is 3 percent of the purchase price, available on a one-unit primary residence through Fannie Mae’s and Freddie Mac’s 97 percent loan-to-value programs. On a $350,000 home, that’s $10,500. You won’t qualify automatically, though: the 3 percent tier is reserved for first-time buyers or for borrowers who fit under an income cap, and putting down less than 20 percent means paying private mortgage insurance every month until you build enough equity to drop it.
How the 3 Percent Floor Works
Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy most conventional mortgages, both cap loan-to-value (LTV) at 97 percent on certain one-unit primary residences.1Fannie Mae. Eligibility Matrix A 97 percent LTV is the same thing as a 3 percent down payment. Borrowers who don’t fit one of the 97 percent LTV programs face a standard minimum of 5 percent down.
These figures apply only to conforming loans, meaning mortgages within the dollar limits Fannie and Freddie will purchase. Borrow more than the conforming limit and you’re in jumbo territory with its own, generally higher, down payment rules.
Who Qualifies for 3 Percent Down
There are two ways in, and they have different rules. Which one applies to you depends on whether you’ve owned a home recently and how much you earn.
Standard 97 Percent LTV: First-Time Buyer Path
Under Fannie Mae’s standard 97 percent LTV program, at least one borrower on the loan must be a first-time homebuyer, defined as someone who hasn’t owned any residential property in the past three years. If you’re applying jointly and only one of you meets that definition, you still qualify. The loan has to be a fixed-rate mortgage on a one-unit primary residence and must be underwritten through Fannie Mae’s Desktop Underwriter system.2Fannie Mae. FAQs – 97 Percent LTV Options
HomeReady and Home Possible: Income-Based Path
Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs also allow 3 percent down and do not require first-time buyer status.2Fannie Mae. FAQs – 97 Percent LTV Options The tradeoff is an income cap: your household income cannot exceed 80 percent of the area median income (AMI) where the property is located.3Freddie Mac. Home Possible AMI varies widely by county and updates annually, so a buyer in a high-cost metro can earn substantially more than one in a rural county and still fit under the cap.
HomeReady is also more flexible about what counts as income. Rent from a boarder living in your home, for example, can be included toward qualifying income.4Fannie Mae. Boarder Income5Fannie Mae. Homeownership Education6Freddie Mac. CreditSmart Homebuyer U
What the 3 Percent Minimum Doesn’t Cover
The 3 percent floor applies only to a one-unit primary residence. For anything else, expect more cash at the table:
- Two- to four-unit primary residence: 5 percent down.1Fannie Mae. Eligibility Matrix
- Second home: 10 percent down.
- Investment property, one unit: 15 percent down.
- Investment property, two to four units: 25 percent down.
To qualify for any primary residence tier, you have to move in within 60 days of closing and live in the home for at least one year. Claiming owner-occupancy to get a lower down payment and then immediately renting out the property is occupancy fraud, and the lender can call the full loan due.
Credit Score and DTI Still Matter
A low down payment doesn’t relax the rest of the underwriting. Fannie Mae requires a minimum credit score of 620 for fixed-rate conventional loans and 640 for adjustable-rate mortgages.7Fannie Mae. General Requirements for Credit Scores Home Possible sets a higher floor for manually underwritten loans: 660 on a one-unit fixed-rate purchase.8Freddie Mac. Home Possible Mortgage Fact Sheet Clearing the minimum gets you approved, but at a higher interest rate and higher PMI premiums, so a borderline score has a real cost.
On debt-to-income, Fannie Mae caps manually underwritten loans at 36 percent of stable monthly income, stretching to 45 percent with strong credit and cash reserves. Loans run through Desktop Underwriter can go as high as 50 percent DTI.9Fannie Mae. Debt-to-Income Ratios A DTI at that ceiling means half your gross monthly income goes to debt payments, which leaves little room for anything unexpected.
The Ongoing Cost: Private Mortgage Insurance
Any conventional loan with less than 20 percent down requires private mortgage insurance. PMI protects the lender, not you, if you default.10Consumer Financial Protection Bureau. What Is Private Mortgage Insurance Rates typically run from about 0.15 percent to nearly 2 percent of the loan amount per year, depending on your credit score, down payment size, and loan term. A borrower putting 3 percent down with an average credit score should expect roughly $100 to $300 per month on a typical loan.
PMI isn’t permanent. Under the Homeowners Protection Act, you can request cancellation once your loan balance reaches 80 percent of the home’s original value, provided you have a good payment history and the property hasn’t lost value. If you don’t ask, the lender must terminate PMI automatically once your scheduled balance hits 78 percent of the original value, as long as you’re current.11Federal Reserve. Consumer Compliance Handbook – Homeowners Protection Act Some borrowers pay PMI for years longer than necessary because they never submit the written request at 80 percent.
Cash You’ll Actually Need at Closing
The down payment isn’t the only money changing hands. Closing costs, which cover the appraisal, title insurance, lender fees, prepaid taxes and insurance, and related items, typically add another 2 to 5 percent of the loan amount.12Fannie Mae. Closing Costs Calculator On a $350,000 purchase with 3 percent down, that’s roughly $10,500 for the down payment plus another $7,000 to $17,000 to close.
Two things can reduce how much of that has to come from your own bank account.
Gift funds. On a one-unit primary residence, your entire down payment can come from a gift. You aren’t required to contribute a single dollar of your own money toward the down payment itself. Acceptable donors include relatives by blood, marriage, or adoption, domestic partners, and people with a long-standing close relationship with you. The donor cannot be the seller, the builder, the real estate agent, or anyone else with a financial interest in the transaction.13Fannie Mae. Personal Gifts You’ll need a signed gift letter stating the amount, confirming no repayment is expected, and listing the donor’s name, address, phone number, and relationship to you, plus a paper trail showing the money move from donor to buyer. For multi-unit properties and second homes, you must contribute at least 5 percent from your own funds before gift money can supplement the rest.
Seller concessions. The seller can agree to pay part of your closing costs, but Fannie Mae caps how much based on your LTV:
- LTV above 90 percent (less than 10 percent down): up to 3 percent of the sale price.
- LTV between 75.01 and 90 percent: up to 6 percent.
- LTV at 75 percent or below: up to 9 percent.14Fannie Mae. Interested Party Contributions
Putting 3 percent down puts you in the most restrictive tier, so the seller can cover at most 3 percent of the price. Anything above that gets treated as a sales concession, which forces the lender to reduce the appraised value and recalculate your LTV.
Conventional 3 Percent vs. FHA 3.5 Percent
FHA loans require a minimum of 3.5 percent down,15U.S. Department of Housing and Urban Development. Loans so conventional financing actually beats FHA on the down payment amount for buyers who qualify. The comparison doesn’t stop there.
FHA is generally more forgiving on credit scores and DTI, so it may be the only realistic option for borrowers who can’t meet Fannie Mae’s 620 floor. But FHA mortgage insurance is harder to shed: on loans with less than 10 percent down, FHA charges a mortgage insurance premium for the life of the loan. Conventional PMI drops off at 80 percent LTV. Over a 30-year mortgage, that difference can add up to tens of thousands of dollars. If your credit clears the conventional bar, the long-term math usually favors conventional. If it doesn’t, FHA is the fallback despite the ongoing insurance cost.