What Is a Conventional 97 Loan? The 3% Down Conventional Option

Q: Who qualifies as a first-time buyer for a Conventional 97 loan?

Anyone who has not held an ownership interest in a primary residence during the previous three years. That definition surprises repeat buyers who have been renting. Someone who sold a home four years ago and rented since generally qualifies again. On a joint application, at least one borrower typically must meet the first-time buyer test, and the home must be a primary residence.

Q: Can I use gift funds for the 3% down payment?

Yes. The entire 3% down payment can come from a documented gift from a family member on a one-unit primary residence. Your lender will need a gift letter confirming the money is not a loan, plus a paper trail showing the transfer. What gift funds cannot do is cover closing costs beyond the loan's 97% ceiling, so budget those separately or negotiate seller concessions.

Q: Is a Conventional 97 loan better than an FHA loan?

For borrowers with credit above roughly 680, usually yes, because PMI is cancelable and there is no upfront mortgage insurance premium. FHA generally wins for borrowers with lower credit scores or higher debt-to-income ratios, since its underwriting is more forgiving. The right answer depends on your specific score, debt load and how long you plan to keep the loan.

Q: What are the loan limits on a Conventional 97 loan?

Conventional 97 loans must stay within the conforming loan limits set annually by the Federal Housing Finance Agency, which vary by county and rise in designated high-cost areas. Because the limits are updated each year, check the current FHFA figure for the county you are buying in rather than relying on a number from a prior year's article.

Written by Samantha SheltonNMLS 1647301Updated September 2026

First-time buyers on the steps of a starter home purchased with a Conventional 97 loan and 3% down

A Conventional 97 loan is conventional financing that covers up to 97% of a home’s purchase price, so you bring 3% down instead of 5% or 20%. On a $300,000 home, that’s $9,000 at the closing table rather than $15,000, and unlike an FHA loan, there’s no upfront mortgage insurance premium added to your balance.¹

The name is the math: 97% loan-to-value. It’s a Fannie Mae and Freddie Mac product limited to a one-unit primary residence, and its defining advantage is that the mortgage insurance ends. Federal law requires your servicer to drop PMI at 78% of the home’s original value, while FHA charges its annual premium for the full term of a 30-year loan above 95% loan-to-value.

Learn how the 3% down payment and the mortgage insurance actually work, what you need to qualify, and how the program compares to FHA. If you’re still mapping the field, start with our Loan Types & Programs guide.

Key takeaways:

Three percent down on a one-unit primary residence: A Conventional 97 finances up to 97% of the purchase price, so a $300,000 home takes $9,000 down instead of the $15,000 a 5%-down program would require.
The mortgage insurance is temporary: Federal law lets you request PMI cancellation at 80% of the original value and requires automatic termination at 78%, while FHA charges 0.55% a year for the life of a 30-year loan taken at 96.5% loan-to-value.
Michigan buyers share one ceiling: All 83 Michigan counties carry the same 2026 conforming loan limit of $832,750, against $541,287 for FHA. A $291,463 gap in how much house each program can finance.

What is a Conventional 97 loan?

A Conventional 97 loan is a conventional mortgage with a maximum loan-to-value ratio of 97%, meaning a 3% minimum down payment on a one-unit principal residence. “Conventional” means it isn’t insured by a government agency. It’s underwritten to Fannie Mae or Freddie Mac guidelines, which is why the rules are consistent lender to lender even though the pricing isn’t.

Three-percent-down conventional financing comes through two doors. The first is the income-capped programs: Fannie Mae’s HomeReady and Freddie Mac’s Home Possible both reach 97% loan-to-value and both limit qualifying income to 80% of the area median income for the property’s location. Neither requires first-time buyer status. Our guide to HomeReady mortgages covers that path, and Fannie Mae publishes the details among Fannie Mae’s low-down-payment conventional options.

The second door is the standard 97% option, which has no income cap and leans on first-time buyer status instead. Fannie Mae requires homeownership education on any purchase above 95% loan-to-value when all borrowers are first-time homebuyers, and defines the term precisely: someone purchasing the property, living in it as a principal residence, with no ownership interest, sole or joint, in a residential property during the three years preceding the purchase. Eligibility for this tier lives in Fannie Mae’s Eligibility Matrix and Freddie Mac’s Guide, both revised periodically, so confirm the current condition before you shop. We track the changes in updates to conventional loan requirements.

How does a Conventional 97 loan work?

You put down 3%, the lender finances 97%, and you pay private mortgage insurance until the balance falls far enough for it to come off. Here’s the arithmetic on a $300,000 home in Waterford, Michigan, beside the FHA version of the same purchase.²

Cash down: 3% of $300,000 is $9,000, leaving a $291,000 loan. FHA’s minimum required investment is 3.5% of the adjusted value, or $10,500, leaving a $289,500 base loan.
Upfront mortgage insurance: A Conventional 97 has none. FHA charges 1.75% of the base loan amount, $5,066 here, typically financed, pushing the FHA starting balance to about $294,566.
Where PMI ends: You can request cancellation once the balance is scheduled to reach 80% of original value, or $240,000, and your servicer must terminate it automatically at 78%, or $234,000.

The conventional buyer starts $1,500 lighter on cash and roughly $3,566 lighter on principal, with a defined exit from mortgage insurance rather than an open-ended one. That’s why the program appears in nearly every conversation about low-down-payment mortgages.

One honest caveat: 3% down means a bigger loan and a bigger payment, and putting 5% or 10% down lowers both the balance and usually the PMI premium. A Conventional 97 is the right answer when cash is the binding constraint. Not automatically when it isn’t.

Conventional 97 requirements at a glance

Six things decide whether 97% financing fits: down payment, credit, debt load, occupancy, property type and loan size.

Down payment. 3%, and it can be a gift: On a one-unit principal residence above 80% loan-to-value, Fannie Mae requires no minimum contribution from your own funds, so the whole down payment can be a documented gift from a relative.
Credit score. 620 is the manual-underwriting floor, not a universal rule: Fannie Mae’s minimum representative score is 620 for manually underwritten fixed-rate loans and 640 for ARMs. Loans run through Desktop Underwriter have no stated minimum, the automated system reads the credit report itself. Lenders in Align’s network apply their own overlays, and 620 is the floor most buyers will be quoted.
Debt-to-income, set by the automated decision, not a flat 43%: The 43% figure repeated across the internet isn’t the agency rule. Fannie Mae caps DTI at 50% for casefiles underwritten through Desktop Underwriter. Manually underwritten loans cap at 36%, stretching to 45% when the borrower meets credit score and reserve requirements.
Occupancy, primary residence only: The 97% tier is limited to a one-unit principal residence. Second homes and investment properties don’t qualify at this loan-to-value.
Property type: Single-family homes, condos, co-ops and planned unit developments are eligible. Freddie Mac’s Home Possible reaches one to four units, with manufactured homes eligible subject to restrictions, though the 97% ratio applies to one-unit properties.
Loan amount, inside the conforming limit: The 2026 one-unit baseline is $832,750, with a ceiling of $1,249,125 in designated high-cost areas. Check the current conforming loan limits for your county rather than trusting an older figure.

Mortgage insurance is required on any conventional loan above 80% loan-to-value. At 95.01% to 97% on a fixed-rate loan with a term over 20 years, Fannie Mae’s standard coverage requirement is 35%; HomeReady gets a reduced 25%, one reason the income-capped path often prices better if you qualify. The CFPB explainer on private mortgage insurance covers what that coverage buys.

Conventional 97 vs. FHA loan: Which is right for you?

The half-point difference in down payment is the least important line below. What separates the programs is mortgage insurance, what it costs upfront and how long it lasts.³

Feature	Conventional 97	FHA loan
Minimum down payment	3% of purchase price	3.5% of adjusted value at 580+; 10% at 500 – 579
Minimum credit score	620 manual; no stated minimum through Desktop Underwriter	580 for maximum financing; 500 with a larger down payment
Upfront mortgage insurance	None	1.75% of the base loan amount
Ongoing mortgage insurance	PMI, cancelable at 80% and terminated at 78% of original value	0.55% a year for the mortgage term above 95% LTV on a 30-year loan
Debt-to-income flexibility	Up to 50% through Desktop Underwriter	Manual ratios of 31/43, stretching to 40/50 with two compensating factors
2026 one-unit loan limit in Michigan	$832,750 in every county	$541,287 in every county

Read the two mortgage insurance rows together. FHA’s 0.55% annual premium applies to 30-year loans above 95% loan-to-value with base loan amounts at or below the national conforming limit, and its duration is the mortgage term. It doesn’t fall off as you build equity. Put 10% down on an FHA loan instead and the premium drops to 0.50% and expires after 11 years.

FHA still wins where its underwriting is genuinely more forgiving: scores in the 500s, thin or bruised credit, and higher debt loads carried by compensating factors. If your score sits comfortably above 620, conventional usually costs less over the years you hold the loan. Our walkthrough of buying a home with a low down payment compares both against the rest of the field, and our overview of conventional loans covers the wider product family.

What Michigan buyers should know

Michigan is unusually simple on loan limits and unusually specific on down payment help, and both change the math on a 3%-down purchase here.

One conforming limit statewide, $832,750: All 83 Michigan counties sit at the 2026 baseline. There’s no high-cost adjustment anywhere in the state, so the same ceiling applies in Oakland County and in the Upper Peninsula.
FHA tops out $291,463 lower, $541,287: Every Michigan county sits at FHA’s national floor, which HUD sets at 65% of the conforming limit. The highest median sale price HUD used for a Michigan county in 2026 was $435,000, and 115% of that still lands below the floor. Above roughly half a million dollars, conventional isn’t merely the cheaper option here, it’s the only one that works.
MSHDA’s $10,000 assistance won’t attach to a Conventional 97: The MI 10K DPA is an interest-free loan of up to $10,000 toward down payment, closing costs and prepaid expenses, statewide, with no monthly payments and repayment deferred until you pay off, sell, refinance or move out. But it must be combined with a MSHDA MI Home Loan first mortgage, and a homebuyer education certificate is required.

That last point is where a broker earns their keep. MSHDA trades a defined first mortgage for $10,000 of help; the Conventional 97 trades that help for a wider menu of lenders competing on price. Which wins depends on your numbers, so price both, something our guide to low-down-payment mortgages walks through.

How Align shops a conventional loan

Conventional pricing moves with your credit, down payment and property, and it differs from one lender to the next. One application with Align goes to multiple wholesale lenders, so you see more than one price for the same loan.

A 2024 Polygon Research analysis of federal mortgage data found broker borrowers paid about $10,662 less over the life of a $400,000 loan than borrowers at nonbank retail lenders.

Already have an offer from one of the big national lenders you see advertised? Bring us the Loan Estimate. We will compare it line by line and show you where we can do better.

Conventional loans in Michigan

Sources: Polygon Research, Loan Costs Channel Study 2024 (2023 federal HMDA data, 30-year fixed purchase loans; commissioned by United Wholesale Mortgage and Willow Canyon Advisors).

FAQ: Conventional 97 loans

Here are answers to common questions about Conventional 97 loans.

Who qualifies as a first-time buyer for a Conventional 97 loan?

A first-time homebuyer, in Fannie Mae’s Selling Guide glossary, is someone purchasing the property, living in it as a principal residence, with no ownership interest, sole or joint, in a residential property during the three years preceding the purchase. Note the wording: any residential property, not only one you lived in. Someone who sold four years ago and rented since generally qualifies again, and displaced homemakers and single parents get a related carve-out. See how conventional loans work.

Can I use gift funds for the 3% down payment?

Yes. On a one-unit principal residence above 80% loan-to-value, Fannie Mae requires no minimum borrower contribution, so the entire 3% can be a documented gift. You’ll need a gift letter stating the amount, confirming no repayment is expected, and listing the donor’s name, address, phone and relationship to you. Gift funds can cover closing costs too. What the 97% ceiling means is that closing costs can’t be financed into the loan. More in buying a home with a low down payment.

Is a Conventional 97 loan better than an FHA loan?

It depends on your credit score and how long you’ll keep the loan. Conventional wins on mortgage insurance: no upfront premium against FHA’s 1.75%, and PMI that terminates at 78% of original value against an FHA premium running the full term of a 30-year loan. FHA wins on flexibility, insuring scores as low as 500 with a larger down payment. Compare both in low-down-payment mortgages.

What are the loan limits on a Conventional 97 loan?

The 2026 one-unit baseline conforming limit is $832,750, with a ceiling of $1,249,125 in designated high-cost areas, and every Michigan county sits at the baseline. The Federal Housing Finance Agency resets these each year, the 2026 baseline rose 3.26% over 2025, so check the current figure for your county instead of trusting an older number. We track changes in updates to conventional loan requirements.

The bottom line on the Conventional 97 loan

A Conventional 97 loan finances up to 97% of a home’s purchase price, so a $300,000 home takes $9,000 down instead of $15,000. It’s limited to a one-unit primary residence, it has to fit the conforming loan limit, $832,750 in every Michigan county for 2026, and it comes in an income-capped version through HomeReady and Home Possible and a first-time-buyer version with no income cap. Its defining advantage over FHA is mortgage insurance: no upfront premium, and PMI your servicer must terminate at 78% of original value. Compare it against the field in our Loan Types & Programs guide.

If you’re ready to find out whether 3% down conventional beats FHA on your file, talk to Align Lending, we’ll shop your scenario across our lender network and put the cash-to-close and mortgage insurance numbers side by side. Call 248-506-5727 or start online today.

Footnotes:

1. Example figures in this article are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. Your down payment, loan amount, mortgage insurance premium and terms depend on your application, property, program and market conditions, and will be itemized on your Loan Estimate. Return to text.

2. The $300,000 Waterford scenario is illustrative arithmetic, not a quote. Private mortgage insurance premiums vary by credit score, loan-to-value, coverage level and insurer and are not included in the comparison above; FHA figures reflect published HUD premium rates and minimum investment requirements, not a specific loan offer. Return to text.

3. Align Lending is not acting on behalf of or at the direction of FHA or HUD. FHA mortgage insurance premium rates, minimum credit score and down payment requirements, qualifying ratios and county mortgage limits are set by HUD and are subject to change. Return to text.

Sources: 2026 baseline conforming loan limit value of $832,750 for one-unit properties, high-cost area ceiling of $1,249,125, and the 3.26% increase over 2025, Federal Housing Finance Agency, “FHFA Announces Conforming Loan Limit Values for 2026.” One-unit limit of $832,750 in all 83 Michigan counties, FHFA Full County Loan Limit List 2026. Conforming loan limits imposed under Fannie Mae’s federal charter, subject to annual change and varying by unit count and location, Fannie Mae Selling Guide B2-1.5-01. HomeReady maximum LTV of 97% for one-unit principal residences underwritten through Desktop Underwriter versus 95% for manually underwritten loans, Fannie Mae Selling Guide B5-6-02. HomeReady qualifying income limited to 80% of area median income, Fannie Mae Selling Guide B5-6-01. Home Possible 97% LTV, 3% down payment, 80% AMI income limit and eligible property types, Freddie Mac, Home Possible. Homeownership education required on purchase transactions with LTV, CLTV or HCLTV above 95% when all borrowers are first-time homebuyers, Fannie Mae Selling Guide B2-2-06. Definition of first-time homebuyer, Fannie Mae Selling Guide Glossary. Minimum representative credit score of 620 for manually underwritten fixed-rate loans and 640 for ARMs, and no minimum credit score for DU loan casefiles, Fannie Mae Selling Guide B3-5.1-01. Maximum DTI of 50% for DU loan casefiles and 36% for manually underwritten loans, exceedable to 45% with credit score and reserve requirements, Fannie Mae Selling Guide B3-6-02. No minimum borrower contribution on one-unit principal residences, eligible donors and gift letter contents, Fannie Mae Selling Guide B3-4.3-04. Mortgage insurance required above 80% LTV, with standard coverage of 35% and HomeReady coverage of 25% at 95.01% to 97% LTV on fixed-rate loans with terms over 20 years, Fannie Mae Selling Guide B7-1-02. PMI cancellation on request at 80% of original value, automatic termination at 78%, the midpoint-of-amortization backstop and the requirement that the mortgagor be current, Consumer Financial Protection Bureau and the Homeowners Protection Act of 1998, 12 U.S.C. § 4902. FHA upfront mortgage insurance premium of 175 basis points and annual premiums of 55 basis points for the mortgage term above 95% LTV and 50 basis points for 11 years at or below 90% LTV on terms over 15 years, with the base loan amount threshold set to the national conforming loan limit, HUD Mortgagee Letter 2023-05 (February 22, 2023), effective for case numbers endorsed on or after March 20, 2023. Minimum decision credit score of 580 for maximum financing and 500 – 579 limited to 90% LTV, maximum purchase LTV of 96.5%, minimum required investment of 3.5% of adjusted value, and manual qualifying ratios of 31/43 through 40/50, HUD Handbook 4000.1. FHA national low-cost area limits set at 65% of the national conforming limit and high-cost area limits at 150%, HUD Handbook 4000.1. FHA 2026 one-unit mortgage limit of $541,287 in Michigan counties and the median sale price values used, HUD FHA Mortgage Limits, CY2026. MI 10K DPA loan of up to $10,000, interest-free, statewide, with no monthly payments, deferred repayment, the homebuyer education certificate requirement and the requirement that it be combined with a MSHDA MI Home Loan, Michigan State Housing Development Authority.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Loan program requirements, mortgage insurance rates, loan limits and assistance program terms change and vary by property, county and lender; confirm your figures with your Loan Estimate and consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.