Low Down Payment
Conventional Loans With Just 3% Down
Most people associate low down payments with FHA loans, but conventional financing offers its own 3% down options — and in many cases, they're the better deal. Fannie Mae's HomeReady and Freddie Mac's Home Possible are purpose-built programs for moderate-income buyers who have solid credit but limited cash for a down payment.
The key advantage over FHA: mortgage insurance on these programs is reduced from standard conventional PMI rates, and it cancels automatically when you reach 20% equity. FHA's mortgage insurance premium stays for the life of the loan if you put less than 10% down. Over a decade or more of homeownership, that difference can save you tens of thousands of dollars.
$0
Upfront mortgage insurance
Head to Head
HomeReady vs. Home Possible: Side-by-Side
Both programs achieve the same goal — 3% down with reduced PMI — but they come from different agencies and have slightly different rules. Here's the complete comparison.
FeatureHomeReady (Fannie Mae)Home Possible (Freddie Mac)
Minimum Credit Score
620
620
Income Limit
80% of area median income
80% of area median income
First-Time Buyer Required?
No (but at least one borrower can't own other property)
No (but at least one borrower must be first-time buyer for 1-unit)
Homebuyer Education
Required (online course accepted)
Required (online course accepted)
Boarder/Rental Income
Allows boarder income for qualifying
Allows boarder income for qualifying
Non-Occupant Co-Borrower
Allowed (income counted in limit)
Allowed with restrictions
Property Types
1-unit, condos, PUDs, manufactured
1-unit, condos, PUDs, manufactured
PMI Reduction
Yes — reduced from standard rates
Yes — reduced from standard rates
Gift Funds
100% of down payment can be gifted
100% of down payment can be gifted
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Which one do I apply for?
You don't choose — your lender does. Bayou Mortgage submits your file to both Fannie Mae and Freddie Mac's automated underwriting systems and uses whichever provides the better approval. The practical differences between HomeReady and Home Possible are minimal for most borrowers. What matters is meeting the shared requirements: 620+ credit score, income under 80% AMI, and completing homebuyer education.
Eligibility
Income Limits: The 80% AMI Rule
Both HomeReady and Home Possible cap your qualifying income at 80% of the area median income (AMI) for the property's location. This is the primary eligibility gate — if your household income exceeds this threshold, you don't qualify for the 3% down option and would need to use standard conventional financing at 5% down instead.
How the Income Limit Works
1
Based on property locationThe AMI limit is tied to where the home is located, not where you currently live or work.
2
All borrower income countsTotal gross income of all borrowers on the loan is measured against the limit.
3
Varies significantly by areaHigher cost-of-living areas have higher AMI limits. A $75,000 income might qualify in one area but not another.
4
Updated annuallyAMI figures are refreshed each year. Bayou Mortgage checks the current limit for your specific property address.
What If I'm Over the Limit?
If your income exceeds 80% AMI, you still have conventional options — just not at 3% down. Standard conventional requires 5% down for most borrowers, or you can look at Fannie Mae's standard 97% LTV program which has no income limit but requires first-time buyer status and carries standard PMI rates.
Your lender can also check whether removing a co-borrower or using only the primary borrower's income brings you under the limit — though both borrowers' incomes must be considered if both are on the loan.
Mortgage Insurance
Reduced PMI on 3% Down Programs
One of the most underappreciated benefits of HomeReady and Home Possible is reduced private mortgage insurance. Standard conventional PMI on a 3% down loan can be expensive — especially below a 720 credit score. These programs negotiate lower PMI rates through the agencies, which directly reduces your monthly payment.
PMI Cost Comparison (Approximate)
Credit ScoreStandard PMIHomeReady/HP PMI
Rates are illustrative and vary by insurer, LTV, and loan amount. Actual quotes provided at application.
The Cancellation Advantage
Unlike FHA mortgage insurance which stays for the life of the loan, conventional PMI on these 3% down programs cancels automatically at 20% equity. Through a combination of principal paydown and home appreciation, most borrowers reach 20% equity within 7-10 years — at which point their monthly payment drops by the full PMI amount.
You can also request early cancellation at 80% LTV based on your home's current appraised value. See the full PMI cancellation guide →
Required Course
Homebuyer Education Requirement
Both HomeReady and Home Possible require at least one borrower to complete a homebuyer education course before closing. This is non-negotiable — the loan won't close without a completion certificate. The good news: the course is available online and can be completed in a few hours.
Accepted Course Providers
✓
Framework (Fannie Mae's platform)Free online course specifically designed for HomeReady borrowers. Takes 4-6 hours.
✓
HUD-approved counseling agenciesIn-person or virtual options available through HUD-certified organizations.
✓
Other approved online providersSeveral third-party providers offer courses that satisfy the requirement. Check with your lender for approved options.
What the Course Covers
The course walks through budgeting for homeownership, understanding mortgage terms, the closing process, maintaining your home, and managing your mortgage payments long-term. It's designed to reduce default rates by preparing first-time buyers for the financial responsibilities of owning a home.
Complete it early in your homebuying process — don't wait until you're under contract and rushing to close.
The Real Comparison
3% Down Conventional vs. FHA 3.5% Down
This is the comparison that matters most for first-time buyers with limited savings. Both options get you into a home with minimal cash — but they work very differently over time. The 0.5% difference in down payment is trivial. The mortgage insurance difference is not.
Cost Comparison
$300,000 Purchase Price · 700 Credit Score
Factor3% Conv. (HomeReady)FHA 3.5%
Down Payment
$9,000
$10,500
Upfront Insurance
$0
$5,089 (1.75% UFMIP)
Monthly MI/MIP
~$125/mo (reduced PMI)
~$133/mo (0.55% MIP)
MI Duration
Cancels at 20% equity
Life of loan
Total MI Over 30 Years
~$12,000
~$52,000
Education Course
Required
Not required
Illustrative example. Assumes 3% appreciation, PMI cancels ~year 8. Actual costs vary. Bayou Mortgage LLC · NMLS #1845349.
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When 3% down conventional beats FHA
If your credit score is 680 or higher and your income is under the 80% AMI limit, the 3% conventional option almost always wins on total cost. You put less money down, pay no upfront insurance premium, get reduced PMI that cancels, and avoid the life-of-loan MIP trap. See the full conventional vs FHA comparison →
Common Questions
3% Down Conventional FAQ
Questions specific to HomeReady, Home Possible, and 3% down conventional programs.
Do I have to be a first-time homebuyer to qualify for 3% down? +
Not necessarily. HomeReady does not require first-time buyer status, though at least one borrower cannot own any other residential property at the time of closing. Home Possible requires at least one borrower to be a first-time buyer for single-unit properties. The definition of "first-time buyer" includes anyone who hasn't owned a home in the past three years.
See first-time buyer definition details →What happens if my income is above the 80% AMI limit? +
You won't qualify for HomeReady or Home Possible, but you may still qualify for Fannie Mae's standard 97% LTV program at 3% down — which has no income limit but requires first-time buyer status and carries standard (non-reduced) PMI rates. Alternatively, a conventional loan with 5% down has no income restrictions and is available to repeat buyers.
See all down payment options →Can I use gift funds for the entire 3% down payment? +
Yes — both HomeReady and Home Possible allow 100% of the down payment to come from gift funds from an eligible donor (family member, employer, or approved down payment assistance program). This is a significant advantage for buyers who have steady income but haven't accumulated savings yet. A gift letter documenting that no repayment is expected is required.
How do I check the income limit for my area? +
Fannie Mae and Freddie Mac both provide online lookup tools where you enter the property address to see the 80% AMI limit. Your loan officer at Bayou Mortgage will verify eligibility during the application process using the exact property address. Income limits are updated annually and vary significantly — what doesn't qualify in one area may qualify in another.
Is the homebuyer education course difficult or time-consuming? +
The online course typically takes 4-6 hours and is self-paced — you can start and stop as needed. It covers budgeting, the mortgage process, closing procedures, and home maintenance. The material is practical and straightforward. You'll receive a completion certificate that your lender needs before closing. Most borrowers find it genuinely useful, especially first-time buyers.
Can I use boarder income to help qualify? +
Yes — this is a unique feature of both programs. If you have a roommate or boarder who pays rent and you can document 12 months of consistent payments, that income can be counted toward your qualifying income. This is particularly valuable for buyers who share housing costs. Documentation typically includes bank statements showing regular deposits and a history of the arrangement.
What's the maximum loan amount for these programs? +
HomeReady and Home Possible follow standard conforming loan limits — $806,500 for single-unit properties in most areas, with higher limits in designated high-cost counties. The loan amount is separate from the income limit. You could qualify under the 80% AMI income cap and still borrow up to the full conforming limit if your DTI ratios support it.
See current loan limits →
See If You Qualify for 3% Down
Bayou Mortgage will check your income against the AMI limit, run HomeReady and Home Possible scenarios, and show you the real monthly payment with reduced PMI.
