What Is a Conventional 97 Loan and How Does It Work?

A Conventional 97 loan offers a pathway to homeownership for individuals with a minimal down payment. This mortgage product requires as little as 3% of the home’s purchase price. Unlike government-backed loans such as those from the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA), a Conventional 97 loan operates under guidelines set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. It primarily benefits first-time homebuyers or those with limited savings.

Defining Conventional 97 Loans

A core feature of the Conventional 97 loan is its 97% Loan-to-Value (LTV) ratio, which translates to a 3% down payment requirement. LTV represents the ratio of the loan amount to the home’s appraised value or purchase price, whichever is lower. For example, a $300,000 home would require a $9,000 down payment.

The term “conventional” indicates the loan is not insured or guaranteed by a government entity, distinguishing it from FHA, VA, or USDA loans. These loans adhere to underwriting standards established by Fannie Mae and Freddie Mac. This allows lenders to sell mortgages on the secondary market, which helps maintain liquidity in the housing finance system.

Due to the low down payment, Private Mortgage Insurance (PMI) is a standard requirement for Conventional 97 loans. PMI protects the lender against potential losses if a borrower defaults, especially when the borrower has less than 20% equity. This insurance is typically paid as a monthly premium, added to the mortgage payment.

PMI is not a permanent feature and can often be removed once a certain level of equity is achieved. Borrowers can request cancellation of PMI once their loan balance reaches 80% of the home’s original value. PMI is automatically terminated when the loan balance is scheduled to reach 78% of the original value, provided the borrower is current on payments.

Conventional loans, including the Conventional 97, are subject to conforming loan limits established annually by the Federal Housing Finance Agency (FHFA). These limits define the maximum loan amount that Fannie Mae and Freddie Mac can purchase or guarantee. For 2025, the baseline conforming loan limit for most of the United States is $806,500, though this limit can be higher in designated high-cost areas.

Qualifying for a Conventional 97 Loan

To qualify for a Conventional 97 loan, borrowers need to meet specific financial criteria. A minimum credit score of at least 620 is typically required. A higher credit score, such as 680 or above, can result in more favorable interest rates and potentially lower PMI costs.

Another important qualification is the debt-to-income (DTI) ratio, which compares a borrower’s total monthly debt payments to their gross monthly income. For Conventional 97 loans, the maximum allowable DTI ratio is often around 43%, though some programs may permit slightly higher ratios up to 50%.

Lenders also require stable and verifiable income, along with a consistent employment history. Borrowers should demonstrate at least two years of employment in the same line of work or a related field. Income documentation, such as pay stubs, W-2 forms, and tax returns, will be required to confirm financial stability.

While Conventional 97 loans are popular among first-time homebuyers, not all programs strictly require this status. If a first-time homebuyer requirement exists, it is generally defined as not having owned a home in the last three years. Some programs may also require completion of a homeownership education course.

The property being purchased must also meet specific criteria. These loans are typically intended for primary residences, including single-family homes, approved condominiums, townhouses, or multi-unit properties (up to four units) where the borrower intends to occupy one unit. The property must undergo an appraisal to ensure its value supports the loan amount.

Navigating the Loan Process

The journey to securing a Conventional 97 loan begins with obtaining pre-approval from a lender. This crucial initial step provides a clear understanding of how much a borrower can afford, giving them a realistic budget for home searching. Lenders review a borrower’s income, assets, and credit history to provide an estimated loan amount.

After receiving pre-approval and finding a suitable home, the next step involves submitting a full loan application. This requires detailed financial documentation, including bank statements, investment account statements, and employment verification. The lender then initiates the underwriting process, where all submitted information is verified. Underwriters assess the overall risk of the loan, ensuring the borrower meets eligibility criteria and the property qualifies.

During underwriting, the lender will order a home appraisal to determine the property’s market value. This appraisal ensures the loan amount is consistent with the home’s value. While the appraisal focuses on value, it is also advisable for the buyer to arrange a home inspection. A home inspection, performed by a qualified professional, identifies any potential structural issues or necessary repairs.

The final stage of the loan process is closing, where all parties sign the necessary legal documents to finalize the home purchase and mortgage. This involves reviewing and signing the promissory note, which outlines the loan terms, and the mortgage or deed of trust, which secures the loan against the property. Borrowers will also be responsible for paying closing costs, which are various fees associated with the loan and property transfer.