Will 3% Down Mortgages Be a Game-Changer?

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Hoping to bust open the mortgage credit box, Fannie Mae and Freddie Mac recently brought back a 3 percent down conventional loan. The aim is to broaden access to homeownership and pull more first-time buyers into the marketplace. Years of tight lending have left scores of would-be buyers on the sidelines.

Both of the government-sponsored enterprises purchased these lower-down payment loans in the past. Fannie and Freddie back about two-thirds of all new mortgages.

Housing economists and mortgage industry insiders have both panned and praised the return of a 3 percent down home loan. Some see it as a slide back toward the lax lending that spurred the subprime mortgage meltdown. Others believe the policy will help give qualified buyers a better foothold in a time of stagnant wages and slowly thawing credit.

“[This] is simply one way we are working to remove barriers for creditworthy borrowers to get a mortgage,” Andrew Bon Salle, Fannie Mae executive vice president for Single Family Underwriting, Pricing and Capital Markets, said in a statement. “We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers.”

These buyers will still need to meet credit, income and other underwriting requirements. As with most other conventional loans, buyers who can’t muster a 20 percent down payment will also need private mortgage insurance.

It’s too early to tell whether lenders will get on board. It’s also unclear just how many buyers these 3 percent options could help.

Program Specifics

Requirements for the 3 percent down mortgages vary slightly.

Fannie’s new program is open to qualified borrowers who haven’t owned a home in the last three years. For buyers, these loans can only be used to purchase a single-unit primary residence with a fixed-rate term. Fannie is also offering a 97 percent loan-to-value refinance option for homeowners with a current mortgage owned by one of the government-sponsored enterprises. Borrowers would be able to extract up to $2,000 from their home’s equity to cover closing costs.

Freddie Mac’s 3 percent down loan won’t hit the market until late March. First-time buyers will need to complete a homebuying education program. Freddie will offer a similar refinance option, but homeowners won’t be able to tap into their equity.

Borrowers will need a minimum 620 FICO score to be eligible for the Fannie program. Freddie Mac uses a 660 FICO benchmark. But Fannie and Freddie don’t make loans: Lenders may want to see higher credit scores — sometimes significantly higher.

These lower-down mortgages will give consumers an alternative to FHA loans. Those government-backed mortgage require 3.5 percent down, but they carry particularly expensive mortgage insurance costs, which borrowers now pay for the life of their loan.

Safety & Access

Critics remain wary about how much these loans will help and how well they’ll perform. The first concern may loom larger than the latter.

A recent Urban Institute study showed lower-down payment loans have similar default rates to loans with 5 or even 10 percent down payments. And the $0 down VA home loan program has had a lower foreclosure rate than top-tier prime loans for most of the last six years.

The study’s authors also noted the most likely recipients of these lower-down loans are borrowers with solid credit scores.

And that might leave plenty of prospective homebuyers still on the sidelines.


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