Real Estate

Low down payment mortgages back for buyers

How is your mortgage rate determined?
How is your mortgage rate determined?

Potential homebuyers who don't have a lot of cash to put down now have a cheaper way to get a loan.

Mortgage giants Fannie Mae and Freddie Mac announced guidelines Monday for loans with down payments as low as 3 percent under a new program largely aimed at first-time homebuyers.

"These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices," said Federal Housing Finance Agency Director Mel Watt in a release.

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The loan must be fixed rate, and the home must be a borrower's primary residence, so this would not apply to investors, according to FHFA officials on a conference call with reporters Monday morning. At Fannie Mae, at least one of the borrowers on the loan must be a first-time homebuyer, defined as not having owned a home in the past three years. Freddie Mac is allowing the low down payment loan for any borrower who meets its underwriting standards.

Future of home prices
Future of home prices

Full documentation of a borrower's income and credit history is required, as is mortgage insurance. Freddie Mac will require credit counseling for its borrowers, while Fannie Mae will in certain cases.

Fannie Mae has a 3 percent down payment product already through state housing finance agencies, but this loan may go through any lender interested in the program. At a conference in November, Bank of America CEO Brian Moynihan said his bank would not participate in a low down payment program and reportedly suggested that if borrowers didn't have 10 percent to put down, they should probably rent. That was before these details were announced.

"[Mr. Moynihan] made those comments several weeks ago as a broad characterization," said Bank of America spokesman Terry Francisco on Monday. "We will evaluate this program."

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Fannie Mae, which is significantly larger than Freddie Mac, will also offer a cash-out refinance through the program, but only on existing Fannie Mae loans, and the amount of the cash out is limited to the lesser of 2 percent of the loan or $2,000. It is designed to help cover closing costs only. Freddie Mac is offering a no cash-out refinance.

Fannie Mae's minimum FICO credit score cutoff is 620, while Freddie Mac's is 660, but both are subject to so-called, compensating factors, so if a borrower has a credit score on the low side, he or she may need to show more assets to mitigate the added risk.

The move to offer these low down payment loans is clearly in response to an industry cry that credit is too tight and stifling demand from first-time homebuyers. These buyers, usually up to 40 percent of the homebuying market, have been stuck at less than a third of today's market. Income growth has not been keeping pace with rising home prices, and as rents continue to rise, potential buyers are having a much tougher time saving for a large down payment.

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Fannie Mae will allow these loans starting Dec. 13, while Freddie Mac will begin underwriting for loans with settlement dates beginning March 23, 2015.