Understanding Your 3% Down Mortgage Options

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

Written By

Reviewed By

Updated on Wednesday, June 9, 2021

If you haven’t built up a big down payment savings fund, there’s good news: Many lenders offer 3% down mortgage programs that won’t clean out your savings account. However, some low-down-payment loan programs have restrictions and other drawbacks worth knowing before you apply.

3% down mortgage options: What are they?

Conventional lenders offer four different low-down-payment options for qualified homebuyers. Government-sponsored agencies Fannie Mae and Freddie Mac set the rules for 3% down conventional mortgages. And unlike 3.5% down payment loans backed by the Federal Housing Administration (FHA), you’ll typically only pay one type of monthly mortgage insurance instead of the costly upfront and annual FHA mortgage insurance premiums.

#1 Fannie Mae HomeReady loan

The Fannie Mae HomeReady mortgage sets income limits to help lower-income borrowers purchase a home with a minimum 3% down payment — you can check the income limits in your area by using Fannie Mae’s lookup tool. Mortgage insurance, which helps cover lenders’ losses on defaulted loans, is required if you make a down payment of less than 20%.

With the Fannie Mae HomeReady loan you can:

  • Add the income of a tenant who will live in the home you’re buying to help you qualify
  • Get a gift, grant or Community Seconds second mortgage to cover your down payment and closing costs
  • Pay a lower monthly mortgage insurance premium than other low down payment loans
  • Qualify even if you’re not a first-time homebuyer


Conventional loans require private mortgage insurance (PMI), and typically the lower your down payment, the more you’ll pay in mortgage insurance. However, the HomeReady program, as well as Freddie Mac Home Possible program (discussed below), offer discounted PMI to qualified borrowers, which may mean a slightly lower monthly payment than a regular low-down-payment loan.

#2 Freddie Mac Home Possible loan

The Freddie Mac Home Possible program comes with income restrictions similar to those of the HomeReady program, and also only requires a 3% down payment. To see the income limits for your area, use the program’s income and eligibility tool. Mortgage insurance is required for any down payment below 20%, but you can request PMI cancellation once you have 20% equity.

With the Freddie Mac Home Possible loan you can:

  • Use your fixer-upper skills towards a down payment with the “sweat equity” feature
  • Get a gift, grant, employer assistance or an Affordable Seconds loan for the down payment
  • Buy a bigger home for a growing family even if you currently own a home
  • Pool your wedding gift funds toward your down payment
  • Qualify with someone who doesn’t occupy the home


Sweat equity is labor and cost used to repair or improve something. The Home Possible program allows you to convert your construction competence into cash for a down payment. As long as you can document that the cost of your time and materials is reasonable for the type of work and area you live, you may be able to make your entire down payment in sweat equity.

#3 Standard conventional 97% loan

For borrowers with incomes that exceed the HomeReady and Home Possible limits, the Fannie Mae standard 97% loan-to-value mortgage may be a good option. Fannie Mae designed the program for borrowers who don’t have or would prefer not to make a large down payment. However, there is a catch: At least one applicant must be a first-time homebuyer.

#4: Freddie Mac’s HomeOne Mortgage

Similar to the Fannie Mae 97% program, Freddie Mac’s HomeOne mortgage only requires a 3% down payment with no income limits. At least one borrower must be a first-time homebuyer, which means they haven’t owned a home in the past three years.

Pros and cons of a 3% down mortgage


  • You leave extra cash in the bank
  • You can buy a home without waiting to save up for a large down payment
  • You may have more tax-deductible mortgage interest with a higher loan balance
  • You can invest extra money into investment funds with a higher return


  • Your monthly payment is higher
  • You may not qualify for as expensive a home as buyers with larger down payments
  • You’ll need to meet more stringent qualifying requirements than low-down-payment government home-loan programs
  • You’ll have less equity in your home when you buy it, which means you could lose money if you have to sell in a rush

How to qualify for a 3% down mortgage

One of the difficulties to getting approved for a 3% down mortgage is tougher qualifying requirements. Studies have shown a lower down payment often leads to more loan defaults, so lenders set higher standards to make sure you can repay your loan. Make sure you can meet the minimum requirements before you apply for a 3% down conventional mortgage.

Minimum qualifying requirementsHomeReadyHome PossibleFannie Mae 97%HomeOne
Credit score620660620620
Income limits80% of area median
income (AMI)
80% of AMINoneNone
First-time homebuyer requirementNoneNoneYes*Yes*
Homebuyer education requirementYesYesYesNone

*Fannie Mae and Freddie Mac define a first-time homebuyer as someone who has not owned a home in the three years before the new home is purchased.


You’ll need to complete a homebuyer education course to be approved for 3% conventional down payment programs. Fannie Mae requires borrowers to take the Framework online education program for its loan programs, while Freddie Mac recommends using its free CreditSmart education course for the HomeOne program. Home Possible borrowers can fulfill the homebuyer education requirement through CreditSmart or other eligible sources, such as a HUD-approved counseling agency or housing finance agency (HFA).

HomeReady vs Home Possible: Which should you choose?

Although the HomeReady and Home Possible programs are very similar, there are some scenarios that warrant choosing one over the other.

The HomeReady program is a good choice if you can prove someone has rented a room in your current home the past 12 months and you’ll need the income to qualify for a new home. If your credit score is below 660, you won’t qualify for the Home Possible program, while HomeReady guidelines permit scores as low as 620.

The Home Possible program is a good fit if you have the construction skills to convert to a down payment with the sweat equity feature. You can also qualify with the income of a relative that won’t live in the home.

Other low- and no-down-payment mortgages

There are other low-down-payment loans available if the 3% down mortgage programs above don’t fit your budget or you’re unable to qualify.

FHA loans. If your scores are below 620, an FHA loan may be your best bet. You’ll only need a 580 credit score with a 3.5% down payment, or a 500 score if you can come up with 10% upfront. The big drawback: You’ll pay FHA mortgage insurance for the life of the loan, unless you can make at least a 10% down payment.

VA loans. The U.S. Department of Veterans Affairs (VA) guarantees loans for active duty military borrowers, veterans and eligible surviving spouses. No down payment (as long as the sale price is lower than the home’s appraised value) or mortgage insurance is required, and most lenders only require a 620 credit score to qualify.

USDA loans. This program is backed by the U.S. Department of Agriculture (USDA) and is aimed at helping low- to moderate-income families buy homes in designated rural areas. No down payment is required, and borrows with scores as low as 640 may be eligible.