Fannie Mae, Freddie Mac offers new home loans for 3% down—or LESS!

Have you heard that you a need 20% down payment in order to get a mortgage to purchase a home?

Using that 20% down benchmark, does the thought of having to save at least $104,000 to purchase a $520,000 home (the median home price in Southern California) make you shake your head or break out in a cold sweat? Especially when you know that half a million dollars won't get you very far in one of the country's most expensive housing markets? 

While there have been home loans that have offered down payments lower than 20% for a few years now, Fannie Mae and Freddie Mac - the huge government-sponsored enterprises that guarantee home loans for the majority of the U.S. mortgage market - have recently introduced new loan products to compete with the traditionally low-down-payment home loans offered by the Federal Housing Administration (FHA). 

From Market Watch

For years, the Federal Housing Administration was the king of the low-down-payment mortgage mountain. Now, Fannie Mae and Freddie Mac, the government-sponsored enterprises that provide capital to the mortgage market, are designing loan products for hopeful home buyers with skinny savings accounts.

With Fannie Mae’s HomeReady and Freddie Mac’s Home Possible, a 3% down payment — or what lenders refer to as 97% loan-to-value — is available on so-called conventional loans. Conventional loans are the loan products most often issued by lenders.

Fannie Mae HomeReady program

Jonathan Lawless, vice president for product development and affordable housing at Fannie Mae, says today’s low-down-payment FHA loans can be “expensive,” with upfront and ongoing mortgage insurance premiums that last for the life of the loan. So Fannie Mae decided to build a competitive low-down-payment loan product of its own.

There are income limits wrapped into the HomeReady program, except in designated low-income neighborhoods. Fannie’s standard 97 LTV loan doesn’t have such restrictions, if at least one borrower is a first-time home buyer.

Home Ready loans are subject to certain income limits in specific areas, unless one of the buyers is a first-time homebuyer.

Freddie Mac’s Home Possible mortgages are also available for as little as 3 percent to 5 percent down, targeting homebuyers in high-cost and underserved communities. Home Possible allows down payments from a variety of sources and no income limits for underserved areas. Applicants do not need to be first-time homebuyers and can have a FICO score as low as 640. Unlike Home Ready, Home Possible requires no minimum borrower contribution for one- to four-unit homes.

These new products are designed to compete with the low-down-payment options offered by the Federal Housing Administration (FHA), which offers loans for as little as 3.5 percent down for those with a credit score of at least 580.

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Freddie Mac Home Possible program

Freddie Mac has its own 97 LTV program, Home Possible. The program assists low- to moderate-income borrowers with loans made for certain low-income areas. Repeat buyers may also qualify.

While Home Possible will continue to be Freddie Mac’s “flagship” affordable mortgage product, Patricia Harmon, senior product manager at Freddie Mac, says there’s even more flexibility in a new program called HomeOne.

At least one borrower must be a first-time home buyer, but there are no income limits or geographic restrictions. And Harmon echoes Lawless’ caution regarding underwriting guidelines.

“If a borrower has a 640 credit score, that’s not an automatic approval, nor is it an automatic decline. It would depend on a lot of other characteristics that borrower has,” Harmon says. “The higher the credit score, the lower the debt, the more cash reserves in place — the higher the probability of being approved.”

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In addition, first-time homebuyers who meet certain qualifications related to credit, income and collateral have been eligible for Freddie Mac's low-down-payment HomeOne program for low- and moderate-income buyers that officially launched in July of this year. 

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