3 Percent Down Mortgage
Fannie Mae and Freddie Mac announced recently that they will start backing mortgages with only a 3 percent down payment of the home’s price, in an effort to open up lending to more low-income and first-time home buyers.
Borrowers must still meet strict criteria: The new loans will only be approved for those who buy private mortgage insurance, have a minimal FICO score of 620, and also provide full documentation of their income, assets and employment. To further reduce risk, the agencies will require borrowers to go through home ownership counseling.
Both programs are for fixed-rate loans given to first time home buyers programs and those who want to refinance their existing homes. Fannie Mae will start backing the loans soon, while Freddie Mac will start offering them later this Spring.
The move should expand access to credit for first time home buyers, mainly younger buyers who haven’t had sufficient time to amass significant savings.
Fannie Mae and Freddie Mac currently back mortgages with as low as 5% down. The Federal Housing Administration, FHA, insures 3.5% loans.
According to Mark Palim, who directs economic and strategic research at Fannie Mae, it’s a welcome expansion of credit:
“It’s not that different from what we are doing now, but every little bit helps,” he said. “The 3 percent down payment loans from Fannie Mae and Freddie Mac should also offer some advantages over the current minimum down payment loans offered by FHA”.
For example, the FHA loans require borrowers to pay for private mortgage insurance premiums for the whole time they pay the mortgage. That’s usually 30 years. That means adding an extra 1.35 percentage points to monthly mortgage rates. A loan carrying a four percent rate, for example, would become a 5.35 percent mortgage. In dollars, that’s about an extra eighty dollar a month for every one-hundred thousand dollars borrowed, or nine-hundred and sixty dollars extra per year. That’s nearly thirty-thousand dollars extra over the span of the loan.
New Fannie Mae and Freddie Mac benefits
Under the new Fannie Mae and Freddie Mac programs, borrowers will be permitted to cancel their private mortgage insurance premiums once the mortgage balance drops below 80 percent of the home’s value. This can be achieved either through paying the balance down, experiencing a rise in the home’s value, or a combination of both.
If home prices increase even a modest 5 percent annually for three or four years, as they have typically done during previous housing booms, these borrowers would most likely be able to cancel their insurance. Boom, they’ve saved tens of thousands of dollars over the next 20 or so years and plus the 3 percent down payment…….who doesn’t want that?