Conventional 97 Loan in Texas: The 3% Down Option Buyers Miss
A lot of first-time buyers in Austin come to me convinced they need 20% down or at least 3.5% through FHA. The Conventional 97 program doesn’t always come up. That’s a missed opportunity for a segment of buyers who’d actually prefer it.
Conventional 97 is a conforming loan product backed by Fannie Mae or Freddie Mac that requires just 3% down. Unlike FHA loans, which carry mortgage insurance for the life of the loan in most cases, PMI (private mortgage insurance) on a Conventional 97 cancels automatically when your equity reaches 20%. For buyers with decent credit who plan to stay put, that math can work strongly in their favor.
Here’s a clear look at what Conventional 97 is, who qualifies in Texas, what it actually costs, and how it stacks up against FHA in a market like Austin.
What Is a Conventional 97 Loan?
The “97” refers to the loan-to-value ratio (LTV): the loan covers 97% of the purchase price, meaning you put down the remaining 3%. The program comes in two main forms:
- Fannie Mae’s HomeReady and Standard 97%: Available to first-time and repeat buyers. HomeReady has income limits tied to area median income (AMI); the Standard 97 does not.
- Freddie Mac’s Home Possible and HomeOne: Similar structure. HomeOne is designed specifically for first-time buyers with no income cap.
In practical terms, the program lets you close on a home in Austin with about $15,000 down on a $500,000 purchase, compared to $17,500 for FHA (3.5%). The gap in upfront cash isn’t huge, but the long-term costs differ more significantly.
Who Qualifies for Conventional 97 in Texas?
The basic qualification requirements for most Conventional 97 products:
- Credit score: Minimum 620 FICO, though rates improve meaningfully at 680 and again at 740. Most borrowers who see the lowest costs are above 700.
- First-time buyer status: For some products (like HomeOne), at least one borrower must be a first-time buyer, defined as someone who hasn’t owned a home in the past three years. For Fannie Mae’s Standard 97, repeat buyers are also eligible.
- Income limits: HomeReady caps qualifying income at 80% of area median income (AMI) for the county. For Travis County in 2026, 80% AMI for a family of four is approximately $84,400. Other products, like HomeOne, have no income cap.
- Debt-to-income ratio (DTI): Generally allowed up to 45% on automated approval, sometimes 50% with strong compensating factors. DTI is the ratio of your monthly debt payments to your gross monthly income.
- Loan type: Primary residence only, 1-unit property. Investment properties and second homes don’t qualify for Conventional 97.
- Loan limit: Must be at or below the conforming loan limit. For 2026 in Travis County, the conforming limit is $806,500 for single-unit properties.
If your credit score is 620 to 659, run the numbers against FHA carefully. FHA’s MIP (mortgage insurance premium) structure may actually be cheaper at lower credit tiers. At 700 and above, Conventional 97 typically wins on total cost.
What Does PMI Cost on a Conventional 97?
PMI on a Conventional 97 depends primarily on your credit score and LTV ratio. Here’s a rough range at the 97% LTV level, based on current Fannie Mae pricing grids (illustrative only, not a quote; subject to change):
- Credit 620 to 659: PMI approximately 1.5% to 1.8% of the loan amount annually
- Credit 660 to 699: PMI approximately 1.0% to 1.4% annually
- Credit 700 to 739: PMI approximately 0.6% to 0.9% annually
- Credit 740+: PMI approximately 0.3% to 0.5% annually
On a $485,000 loan (3% down on a $500,000 purchase), a borrower with a 720 credit score might pay roughly $340 to $365 per month in PMI. The same borrower with a 760 score might pay $145 to $175. These are illustrative figures; actual PMI costs depend on the specific lender, MI company, and current pricing adjustments.
PMI cancels automatically when your LTV drops to 78% based on the original purchase price, and you can request cancellation at 80% LTV by submitting a written request. Compare that to FHA: if you put down less than 10% on an FHA loan, MIP lasts for the life of the loan unless you refinance.
Conventional 97 vs. FHA in Austin: Which Makes More Sense?
Both programs let you buy with minimal down payment. The choice usually comes down to three factors: credit score, how long you plan to stay, and property type.
FHA loans charge an upfront MIP of 1.75% of the loan amount (rolled into the loan at closing) plus an annual MIP of roughly 0.55% for most borrowers. On a $485,000 loan, that’s about $8,488 in upfront MIP and $223 per month in ongoing MIP. For a buyer with a 660 credit score who needs leniency on DTI or past credit events, FHA often makes sense.
For a buyer in Austin with a 720 or higher score, strong W-2 income, and no blemishes on their credit, Conventional 97 frequently costs less over time. The PMI is lower, cancellable, and there’s no upfront MIP.
One other factor worth noting: Austin has a significant amount of new construction. Many builders have preferred lenders who push FHA because of volume agreements. Ask your loan officer to run a side-by-side comparison for your specific scenario before defaulting to either product.
You can review down payment options by price tier in Travis County for a fuller picture of what different down payment levels look like across Austin neighborhoods.
Can You Use Gift Funds for the 3% Down?
Yes, with conditions. Fannie Mae allows 100% of the 3% down payment to come from a gift on a Conventional 97 loan, provided the gift is from an acceptable donor (immediate family member, domestic partner, or fiance). The donor must provide a gift letter confirming the funds are a gift and not a loan, and you’ll need to document the transfer through bank statements.
Freddie Mac’s HomeOne program allows the same. If you’re using HomeReady, gift funds from an acceptable donor also work, as long as you document properly.
For the full documentation picture, see our guide to gift funds for a Texas down payment, including what lenders look for in the bank statements before approving a gift-funded purchase.
What About the Pre-Approval Process?
Getting pre-approved for a Conventional 97 loan works the same way as any conforming mortgage. Your lender will pull your credit, collect income and asset documentation, and run your file through Fannie Mae’s Desktop Underwriter (DU) or Freddie Mac’s Loan Product Advisor (LPA) automated system.
One thing to know: if you’re right on the edge of the income limit for HomeReady (80% AMI for Travis County), run both HomeReady and Standard 97 through the system. HomeReady may come with a better PMI rate through Fannie’s preferred structure, but Standard 97 has no income cap if you’re slightly over. See what changes between pre-qualification and pre-approval to understand where in the process this income check happens.
Frequently Asked Questions
Can I use Conventional 97 if I’ve owned a home before?
It depends on the product. Fannie Mae’s Standard 97% loan is available to both first-time and repeat buyers. HomeReady and Freddie Mac’s HomeOne both require at least one borrower to be a first-time buyer, defined as someone who hasn’t owned a primary residence in the past three years. If you’re a repeat buyer, ask about the Standard 97 specifically.
Does Conventional 97 have income limits in Travis County?
Some products do, some don’t. HomeReady caps income at 80% of the area median income (AMI) for the property’s census tract. For Travis County in 2026, that limit is roughly $84,400 for a four-person household. Fannie Mae’s Standard 97 and Freddie Mac’s HomeOne have no income limits, making them available to higher-earning buyers who still want to put down only 3%.
How long does PMI last on a Conventional 97?
PMI on a conventional loan cancels automatically when your loan balance drops to 78% of the original purchase price based on your amortization schedule. You can also request cancellation in writing when your balance reaches 80% LTV, and the lender must remove it if your property value supports the equity. A lender-ordered appraisal may be required. This differs from FHA, where MIP often lasts for the life of the loan if you put down less than 10%.
What credit score do I need for a Conventional 97 loan?
The minimum credit score is 620 for most Conventional 97 products. Your PMI rate and mortgage interest rate both improve significantly above 680 and again above 740. If your score is 620 to 659, compare Conventional 97 carefully against FHA, because FHA’s pricing at lower credit tiers is sometimes more favorable. Subject to credit, income, and property qualification.
Can I buy a duplex or investment property with Conventional 97?
No. Conventional 97 is limited to 1-unit primary residences. If you want to buy a 2-4 unit property or an investment property, you’ll need a different loan product with a larger down payment. Fannie Mae requires 15% to 25% down on 2-4 unit investment properties, depending on the number of units.
Is there a loan limit for Conventional 97 in Travis County?
Yes. Conventional 97 is a conforming loan, so the purchase price must fall within the conforming loan limit for your county. In Travis County for 2026, the conforming limit is $806,500 for a single-unit property. Purchases above that threshold require a jumbo loan, which has its own down payment and qualification rules and doesn’t qualify for Conventional 97 pricing.
If you want to know whether Conventional 97 fits your situation in Austin, schedule a discovery call and we’ll walk through your options together. No pressure, no commitment, just clarity.
Ferrando Financial LLC | NMLS# 2403080 | Licensed in Texas. This content is for educational purposes only and does not constitute a commitment to lend. Loan approval is subject to credit, income, and property qualification. PMI rates shown are illustrative only and do not represent a quote. Income limits are approximate for Travis County 2026; confirm current figures with your loan officer. Conforming loan limits are set annually by FHFA and subject to change. Sources: Fannie Mae Selling Guide, Freddie Mac Seller/Servicer Guide, FHFA 2026 conforming limits.
