December 9, 2014 in Fannie Mae & Freddie Mac 3% loans, Fannie Mae 3% loan, First time home buyer loan, Freddie Mac 3% loan, Government backed loan programs, Loan Programs, Low down payment loan by Margus Mahar, Realtor
In effort to open up lending more to first time and low-income home buyers, Fannie Mae and Freddie Mac announced Monday (12/8/14), that they will start backing mortgages with down payments of as little as 3% of the home’s price.
Important details about these programs:
- All borrowers must receive home ownership counseling prior to purchase
- A minimum credit score of 620 and of course provide complete documentation of their income
- It is a fixed-rate loan given to both to first time homebuyers and those seeking to refinance
- Fannie will start backing the loans as soon as December 13 of 2014, while Freddie will start offering them March 23 of 2015.
- !!! Unlike FHA’s 3.5% loan the Fannie-Freddie 3% borrowers are permitted to cancel their private mortgage insurance premiums once the mortgage balance drops below 80% of the home’s value.
- In example if home prices increase 5% a year for 3-4 years, the borrower can cancel their PMI (private mortgage insurance) and save tens of thousands of dollars over the next 26 or 27 years.
Lowered down payment expands access to credit for first-time home buyers, typically younger buyers who have not have had enough time to save a big lump sum.
Fannie and Freddie already back mortgages with as low as 5% down. And the Federal Housing Administration (FHA) insures 3.5% loans.
According to Mark Palim, who directs economic and strategic research at Fannie Mae, it’s a welcome expansion of credit.”It’s not a radical departure from what we’re doing now, but anything at the margins helps,” he said.
The 3% loans from Fannie and Freddie should also offer some advantages over the 3.5% down loans offered by FHA, according to Palim.
For example, the FHA loans require borrowers to pay for private mortgage insurance premiums for the entire term of the mortgage — typically 30 years. That means adding an extra 1.35 percentage points to monthly mortgage rates. A loan carrying a 4% rate, for example, becomes a 5.35% mortgage.
In dollars, that’s about an extra $80 a month for every $100,000 borrowed or $960 a year. That adds up to nearly $30,000 over the life of the loan.
Under Fannie and Freddie’s programs, borrowers are permitted to cancel their private mortgage insurance premiums once the mortgage balance drops below 80% of the home’s value – either because they’ve made enough payments or the home’s value has risen.
If home prices increase 5% a year for three or four years, for example, these borrowers may be able to cancel their insurance and save them tens of thousands of dollars over the next 26 or 27 years.
New 3% down home loans from Fannie Mae and Freddie Mac – by Margus Mahar
Margus Mahar, Realtor®
JC Penny Realty LLC