The Basics
Conventional Isn't Just for 20% Down Anymore
The conventional loan landscape has changed dramatically for first-time buyers. With programs allowing as little as 3% down, 100% gift fund eligibility, and the permanent advantage of cancellable mortgage insurance, conventional has become a serious competitor to FHA for first-time homebuyers — especially those with credit scores above 680.
The three primary conventional paths for first-time buyers are HomeReady (Fannie Mae), Home Possible (Freddie Mac), and the standard 97% LTV program. Each has slightly different eligibility rules, but they share a common structure: 3% minimum down payment, reduced PMI rates compared to standard conventional, and access to the full conforming loan limit. Understanding which program fits your income and credit profile determines whether conventional or FHA delivers the better overall deal.
80%
AMI income cap (HomeReady)
$0
Upfront mortgage insurance
Programs
Three Paths to 3% Down on Conventional
All three programs allow a 3% down payment on a primary residence, but they serve slightly different borrower profiles. The key distinctions are income limits, first-time buyer requirements, and available PMI discounts.
HomeReady (Fannie Mae)
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3% down, 620 minimum creditFull conforming limits apply — up to $806,500 in standard areas.
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Income limit: 80% of area medianYour qualifying income cannot exceed 80% of AMI for the property's location. Lookup tool available on Fannie Mae's site.
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Not limited to first-time buyersAny borrower meeting the income limit can use HomeReady — repeat buyers included.
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Boarder and rental income countedIncome from roommates or accessory dwelling units can help you qualify — unique to HomeReady.
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100% gift funds allowed
Your entire 3% down payment can come from family gifts. No own-funds requirement. See gift fund rules →
Home Possible (Freddie Mac)
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3% down, 620 minimum creditSame down payment and credit floor as HomeReady.
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Income limit: 80% of area medianSame income cap as HomeReady. Uses Freddie Mac's area eligibility tool for lookup.
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Not limited to first-time buyersLike HomeReady, repeat buyers who meet income limits can use Home Possible.
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Sweat equity countedHome Possible allows "sweat equity" contributions toward the down payment in some cases — HomeReady does not.
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100% gift funds allowedFull down payment can be gifted from eligible family members.
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The standard 97% LTV program
If your income exceeds the 80% AMI cap for HomeReady or Home Possible, the Fannie Mae 97% LTV program is the alternative. It requires at least one first-time buyer on the loan and has no income limit. Down payment is still 3% and PMI is required, though without the reduced PMI pricing that HomeReady and Home Possible offer. This is the fallback for higher-income first-time buyers who want minimal down payment on conventional.
Side by Side
HomeReady vs. Home Possible: Detailed Comparison
These two programs are close siblings — both backed by GSEs, both targeting moderate-income borrowers, both offering 3% down. The differences are subtle but can matter depending on your specific financial profile.
FeatureHomeReady (Fannie Mae)Home Possible (Freddie Mac)
Income Limit
80% of area median income
80% of area median income
First-Time Buyer Required
No
No
Homebuyer Education
Required (online accepted)
Required (online accepted)
Gift Funds
100% of down payment
100% of down payment
Boarder / Rental Income
Yes — unique feature
No
Sweat Equity
No
Yes — unique feature
PMI Discount
Reduced rates available
Reduced rates available
PMI Cancellation
Yes — at 20% equity
Yes — at 20% equity
Loan Limit
Full conforming ($806,500)
Full conforming ($806,500)
Eligibility
Income Limits on 3% Conventional Programs
Both HomeReady and Home Possible cap your qualifying income at 80% of the area median income (AMI) for the property's census tract. This isn't your personal income limit from previous years — it's the income being used to qualify for the mortgage, measured against the local median. AMI varies significantly by geography, so a buyer earning $75,000 might qualify in one area but not in another.
If you exceed the 80% AMI threshold, you're not locked out of 3% down — the Fannie Mae 97% LTV program has no income cap (but does require at least one first-time buyer). Alternatively, putting 5% down on standard conventional eliminates all income-based restrictions while keeping your down payment relatively low.
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How to check your eligibility
Fannie Mae and Freddie Mac each provide online lookup tools where you enter the property address to see the income limit for that specific location. Your lender can also run this check in seconds during pre-approval. The AMI lookups are property-specific — even addresses a few miles apart can have different caps if they fall in different census tracts. Bayou Mortgage checks this automatically when evaluating your loan options.
Requirement
Homebuyer Education: What's Required
Both HomeReady and Home Possible require at least one borrower to complete a homebuyer education course before closing. This isn't just a checkbox — the course covers budgeting, the mortgage process, maintaining your home, and avoiding foreclosure. The good news is that it's typically free or very low cost, and many providers offer online completion.
Accepted Course Providers
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Framework (Fannie Mae's platform)Free online course specifically designed for HomeReady borrowers. Completes in about 4–6 hours.
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CreditSmart (Freddie Mac's platform)Free online education for Home Possible borrowers. Similar scope and duration.
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HUD-approved counseling agenciesIn-person or phone counseling from a HUD-certified housing counselor. Accepted by both programs.
Key Details
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Must be completed before closingYour loan officer can issue the pre-approval before the course is done, but the certificate is needed before the loan closes.
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Only one borrower needs to complete itIf you're buying with a co-borrower, only one person is required to take the course.
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Certificate provided upon completionYou receive a certificate that your lender files with the loan documentation. Valid for one year from completion.
Comparison
First-Time Buyer: Conventional 3% vs. FHA 3.5%
This is the core decision for most first-time buyers. Both options allow low down payments and serve similar credit profiles, but the long-term cost structure differs dramatically because of how each program handles mortgage insurance.
FeatureConventional 3% DownFHA 3.5% Down
Upfront Insurance Fee
$0
1.75% of loan amount
Annual Insurance
0.30%–1.50% (credit-based)
0.55% (flat rate)
Insurance Cancellation
Yes — at 20% equity
No — life of loan
Min Credit Score
620
580 (3.5% down)
DTI Maximum
50% (AUS approved)
57% (with factors)
Income Limits
80% AMI (HomeReady/HP)
None
Property Flexibility
Primary, second, investment
Primary only
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The decision framework
Above 720 credit: conventional almost always wins because PMI is cheap and cancels. Between 680–720: conventional is usually better but run both scenarios. Between 620–680: FHA often has lower total cost because conventional LLPAs make the rate expensive. Below 620: FHA is your only option (conventional floor is 620). Below 580: FHA with 10% down is the only conforming path. See the complete conventional vs FHA comparison →
First-Time Buyer? Get Your Options Compared.
Bayou Mortgage runs HomeReady, Home Possible, standard 97%, and FHA scenarios side by side — so you can see which program saves you the most.
Common Questions
First-Time Buyer FAQ
Answers about first-time buyer conventional programs, eligibility, and comparisons.
What counts as a "first-time buyer" for conventional loans? +
The standard definition is someone who has not owned residential property in the past three years. If you owned a home four years ago but have been renting since, you qualify as a first-time buyer. This definition applies to the Fannie Mae 97% LTV program. HomeReady and Home Possible don't require first-time buyer status at all — they use income limits instead.
Do I have to be a first-time buyer to put 3% down on conventional? +
Not necessarily. HomeReady and Home Possible both allow repeat buyers who meet the income limits (80% of area median income). Only the standard Fannie Mae 97% LTV program requires at least one borrower to be a first-time buyer. If you're a repeat buyer above the income limit, your minimum is 5% down on standard conventional.
Is the homebuyer education course difficult? +
The online courses (Framework for HomeReady, CreditSmart for Home Possible) are self-paced, typically take 4–6 hours, and are designed for accessibility. They cover budgeting basics, the home-buying process, understanding your mortgage terms, and maintaining your home. Most borrowers find them informative rather than difficult. You receive a certificate of completion to submit to your lender.
Can my parents gift the entire 3% down payment? +
Yes — both HomeReady and Home Possible allow 100% of the down payment to come from gift funds. The donor must be a family member (parent, grandparent, sibling, etc.) or fiance/fiancee. A gift letter stating the amount, relationship, and that no repayment is expected is required, along with a paper trail showing the fund transfer.
See full gift fund rules →How does the income limit for HomeReady work? +
Your qualifying income (the income you're using on the loan application) cannot exceed 80% of the area median income for the census tract where the property is located. This is checked by entering the property address in Fannie Mae's online lookup tool. If you're a two-income household, both incomes count. The limit is property-specific, not borrower-specific, so it can vary by the address you're purchasing.
Which is better for a first-time buyer — conventional or FHA? +
It depends primarily on your credit score. Above 720, conventional 3% down programs almost always produce lower total costs because PMI is cheap and eventually cancels. Between 660–720, it's close — run both scenarios. Below 660, FHA typically wins because conventional LLPA adjustments make the rate significantly more expensive at lower credit tiers.
See how credit score affects conventional pricing →Can I use down payment assistance with HomeReady or Home Possible? +
Yes — both programs are compatible with most down payment assistance (DPA) programs. DPA can cover part or all of the 3% minimum, and many state and local programs are specifically designed to work with these conventional products. Bayou Mortgage can identify available DPA programs in your area and layer them into your conventional financing structure.
Ready to Buy Your First Home?
Bayou Mortgage compares every available program and shows you the exact monthly payment, total cost, and PMI timeline — so you buy with confidence.
