Low Down-Payment Mortgage Programs!

In an effort to make homeownership more accessible, mortgage giants Fannie Mae and Freddie Mac announced that once again they will back mortgages with down payments as low as 3 percent. The new low-down payment mortgage programs could reduce costs for first-time and lower-income home buyers.

Making sense of the story

  • Under the program, mortgages with low down payments would be available to first-time home buyers, borrowers who haven’t owned a home for at least a few years, and to those who have lower income.
  • FHFA Director Melvin Watt commented, “These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practice. To mitigate risk, Fannie Mae and Freddie Mac will use their automated underwriting systems, which include compensating factors to evaluate a borrower’s creditworthiness.”
  • Private mortgage insurance (PMI) will still be required as borrowers are putting less than 20 percent down, but unlike with FHA loans, the PMI will typically roll off after five years once 20 percent equity has been reached.
  • To address criticism about loose lending standards, borrowers under the new programs would have to meet criteria that offset the increased risk, such as high reserves or lower debt-to-income ratios.
  • The programs could be available to borrowers with credit scores of as low as 620, which is the current Fannie and Freddie minimum for other loans.
  • Some studies have shown that moving from a 5 percent down payment to a 3 percent down payment doesn’t result in many more defaults. About 0.4 percent of borrowers in 2011 who made down payments of 3 percent to 5 percent on loans backed by Fannie Mae have defaulted—no more than borrowers who made down payments of 5 percent to 10 percent.
  • Fannie’s program will go into effect almost immediately, while Freddie’s won’t be available until March.
  • Source: Wall St. Journal

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