First-Time Homebuyers May Only Need 3% Down Payment, But It Won’t Be A Cakewalk

In October, the director of the Federal Housing Finance Agency announced that the regulator had reached a deal that would allow bailed-out mortgage-backers Fannie Mae and Freddie Mac to sign off on loans with down payments of less than 5%. Today, Fannie and Freddie revealed more details on what it would take for home buyers to be eligible for the reduced requirement, and getting one of these loans won’t be as easy as filling out a form.

In general, to qualify for the 3% down payment, at least one of the buyers taking out the loan must be a first-time buyer. There are also income requirements, and borrowers may need to attend home-buyer counseling in order to be eligible.

There are currently more details available about low down-payment mortgages backed by Fannie Mae, as they are becoming available to lenders immediately. Freddie Mac’s revised guidelines won’t go into effect until March 2015.

For the Fannie loans, borrowers can have credit scores as low as 620, but underwriters will be able to consider mitigating factors like low debt-to-income ratios. So if a borrower has a low credit score but owes little or nothing to creditors, that will be taken into account.

The Freddie offering determines eligibility partially based on the median income of the borrower’s area. If the borrower earns above that median income, they may not be able to get the lower down payment.

In all cases — just like in most mortgages where the borrower is putting down less than 20% — borrowers will be required to purchase mortgage insurance and make payments until the loan-to-value ratio reaches 80%.

While there is some worry that the decreased down payment might increase credit availability to borrowers who are at a higher risk for default, recent studies show that the default rate among people making down payments of 3-5% is the same as those with down payments in the 5-10% range.

Overall, Fannie says that its delinquency rate among single-family loans has plummeted to below 2%.

Additionally, neither Fannie nor Freddie expect the 3% down payment loans to become wildly popular. Instead, the goal is to open up the hope of homeownership to people who can make mortgage payments but who lack the cash to make a 5% down payment.

Though Fannie and Freddie have been using 5% as the minimum for down-payments, the Federal Housing Agency has backed certain loans for first-time buyers with as little as 3.5%. However, the costs associated with those loans have increased sharply in recent years.


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