3% Down Payment Mortgages Are Back

3% Down Payment Mortgages are BackStarting December 13th, buyers will be able to buy homes with Fannie Mae backed mortgages with as little as 3% down! This is great news for first-time home buyers, many of whom have not been able to afford the typical 5% down payment for conventional loans backed by Fannie Mae or Freddie Mac, which are the best priced loans available.

The original announcement came in October from Mel Watt, Director of the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac don’t directly offer mortgage loans but instead buy the mortgages from mortgage companies, banks, credit unions, and other financial institutions so that they, in turn, can lend to more homeowners. In order for lenders to sell their loans to Fannie/Freddie, they must adhere to standards or risk being forced to buy the loans back.

These new policy changes loosen mortgage purchase guidelines to encourage lenders to offer mortgages to more borrowers, even those with less than perfect credit.  Buyers with credit as low as 620 can now qualify for a 3% down mortgage.

Although FHA currently offers a 3.5% down payment option, it is much more expensive to get an FHA loan because of upfront premiums and the high mortgage insurance. Home buyers who use FHA loans pay an upfront premium of 1.75%.

These fees add up, so a 3% loan backed by Fannie/Freddie would actually be much cheaper for borrowers.

From 2003 to 2007 Fannie Mae and Freddie Mac loosened up their guidelines so much that too many people who were not qualified to buy a home were buying homes they could not afford.  Then in 2007 after the market began to crash they substantially tightened up their guidelines.  Now they realize that they over-tightened the guidelines so they are loosening them up a little.

For many borrowers a change from having to come up with 3% down instead of 5% could mean the difference between being able to purchase a home and having to put it off.

For example, a 5% down payment on a $300,000 home would be $15,000, while a 3% down payment would be considerably lower: $9,000. This would be welcome news for the housing market as more borrowers will be able to purchase a home and take advantage of low interest rates before they go back up.

Fannie Mae’s 3% down option will be available December 13, 2014 but it will accept applications before then. Freddie Mac’s 3% down program, Home Possible Advantage, will be available in March 2015.