Breaking News: The New 3 Percent Down Home Loan

Breaking news: Fannie Mae and Freddie Mac outline a new plan that will lower down payments for first time homebuyers from 5% to 3%. The plan, which has been in the works for some time, but is just now coming to fruition, has caused quite the stir in the lending world. To give you a sense of the difference, it means that the obligatory down payment on a $250,000 home would fall from $12,500 to $7,500. Quite the difference, no?

And it’s that difference that is “banking” on (excuse the pun). The plan is attractive to potential buyers with good credit who might not have enough cash for the higher down payment price. So what else should you know about this plan? Read on to see how this exciting new loan works.

The Low Down on the Lower Down Payments

So here’s the deal: Fannie Mae and Freddie Mac, the two Government Sponsored Enterprises (or GSE’s) have loosened their guidelines to allow mortgage companies to originate these loans with lower down payments.

The basics of the loan are:

  • At least one borrower must be a new home buyer (defined as someone who hasn’t owned a home in the past 3 years)
  • Applies to conventional loans insured by Fannie Mae or Freddie Mac
  • Applies to fixed-rate, 30-year loans
  • Loans require mortgage insurance (nearly all loans greater than 80% LTV require this, so it’s not surprising)
  • Borrower must participate in homeowner counseling

If you’re a first time home buyer as per the above definition, and are interested in this lowered down payment, contact your lending professional for more information. We are already starting to see lenders releasing this program to the public.

In Their Own Words

A statement by on the Federal Housing Finance Agency’s website from Melvin L. Watt, Director of the FHFA, explains the plan on the day of its release:

​“The new lending guidelines released today by Fannie Mae and Freddie Mac will enable creditworthy borrowers who can afford a mortgage, but lack the resources to pay a substantial down payment plus closing costs, to get a mortgage with 3 percent down.  These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices.

“To mitigate risk, Fannie Mae and Freddie Mac will use their automated underwriting systems, which include compensating factors to evaluate a borrower’s creditworthiness.  In addition, the new offerings will also include homeownership counseling, which improves borrower performance.  FHFA will monitor the ongoing performance of these .”

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Nice newsletter. Good article. Good information. Thank you. Carol

For conventional financing, borrowers with scores at 740 or anywhere above generally receive the same loan pricing (rate and cost). That being said, the better your credit the higher your chances of receiving loan approval with high debt to income (up to 50%) or high loan to value (up to 95%) which can be a major benefit when applying for a new loan. For Jumbo financing, borrowers with credit scores above 800 are generally rewarded with both better pricing and easier guidelines. There are no situations where better credit is a negative when obtaining new financing so we should all continue to strive to reach and then stay in the 800’s.

What are the advantages of a score over 800

Thank you Mike for this information. As a residential realtor the information that you provide is crucial to a successful transaction for my clients. You are indeed a pleasure to recommend to all of my clients. You are so professional, thorough, conscientious and pleasant to work with. !!

Hi Dane! Wanted to make sure I'm clear on this. Am I right in saying that on whichever remodel is done you still take a loss rather than an increase in value - the ROI will never exceed 100% of cost?