Remember not too many years ago when you could get a conventional mortgage with adown payment in the single digits? If you thought those days would never return then Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”)have a surprise for you. Both have recently introduced loan programs aimed at low- to moderate-income homebuyers, many of whom have been unable to participate in the housing market because of higher downpayments required over the last few years.
(Fannie Mae and Freddie Mac are government-sponsored enterprises (“GSE”) whose function is to expand the secondary mortgage market by pooling mortgages into mortgage-backed securities which are bought by investors.)
Under Freddie Mac’s new “Home Possible Advantage” program, a first-time home buyer can now qualify for a conforming conventional loan with a down payment as low as 3% of the sales price. The buyer must enroll in a borrower education program.
Fannie Mae similarly now offers a first-time buyer program with a 3% down payment. At least one co-borrower must be a first-time homebuyer, and the loan is still subject to the other requirements which were in effect previously for conventional loans. These requirements include income documentationto avoid “low-doc” or “no-doc” lending, underwriting guidelines and risk-management standards; standard private mortgage insurance (“PMI”) coverage and costs apply.
Although alternative government-backed types of mortgages are available with no or low down payments, they might not be as attractive as the new Fannie Mae and Freddie Mac 3% programs. For example, a Federal Housing Administration (“FHA”) loan requiresa downpayment of only 3.5% and the loan is subject to flexible underwriting standards. However, unlike a conventional loan in which PMI can be eliminated once the loan-to-value ratio drops below 80%, the monthly mortgage insurance premium (“MIP”) for an FHA loan is required for the life of the loan. An FHA loan, unlike a conventional loan, also requires payment by the borrower of an “up-front” MIP equal to 1.75% of the loan amount, to be paid at the time of the real estate closing.
A Veterans Administration (“VA”) loan is another type of low down payment loan, offering a zero down payment. However, unlike a conventional loan, it is restricted to borrowers who are either veterans or active military personnel, and it requires the payment of an up-front VA funding fee.