Mortgage and down payment

It’s no secret that the biggest hurdle to clear for many first-time and low-income homebuyers is salting away enough cash for the down payment and closing costs.

Now, two government-backed mortgage mammoths are lowering that hurdle and making it possible for this dream to become a reality for more Americans.

Freddie Mac and Fannie Mae – which provide mortgage capital to lenders and purchase mortgages from loan-originating lenders – recently introduced new programs that each require as little 3 percent down.

Specifically, Freddie Mac’s new Home Possible Advantage program, beginning March 23, offers qualified borrowers a conforming, conventional fixed-rate 15-, 20- or 30-year mortgage with a maximum loan-to-value ratio of 97 percent, which can be used to purchase a single-unit property or complete a refinance (without taking out cash) of an existing mortgage. Although the program is available to any eligible borrower, first-time homebuyer applicants must complete a homeownership education and counseling program, and other restrictions apply.

Meanwhile, Fannie Mae in December began offering a similar 97-percent LTV loan option for any borrower who hasn’t owned a primary residence for three years. A counseling/education course is not required, but other stipulations and exclusions apply.

Applicants to either program must have a minimum credit score of 620, provide thorough documentation of employment, income and assets, and purchase private mortgage insurance.

“The big plus is that these two programs open up homeownership to hundreds of thousands of new buyers, which will also help stabilize the economy,” says Melissa L. Cohn, president of Guard Hill Financial Corp. in New York. “The goal is to give younger people or people with tarnished credit a better chance to be able to purchase.”

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Additionally, Fannie and Freddie’s new 3-percent-down options help raise awareness and hope among prospective buyers, say the experts.

“Research in 2014 clearly showed that a significant cause in the drop-off in sales to first-time homebuyers was that they didn’t think they could qualify,” says Rob Chrane, CEO of Down Payment Resource in Atlanta. Chrane quotes finding from a Zelman and Associates survey last year show that only 28 percent of renters and people living in someone else’s house were optimistic that they could qualify for a mortgage, suggesting a large majority of first-time homebuyers could be underestimating their ability to receive a mortgage with little down.

Previously, the maximum LTV ratios for both the Fannie and Freddie loans were 95 percent. The gap between a 5-percent and a 3-percent down payment “could make a meaningful difference in their decision to purchase a home because home prices have increased very rapidly, by nearly 40 percent over the past five years,” says Nela Richardson, chief economist with Redfin in Seattle.

The best candidates for either program are millennials and other folks with decent credit and stable income but little cash saved, says Casey Fleming, a San Francisco-based mortgage adviser and real estate author.

“The number of families who qualify and for whom it is the right product is actually very small, but for the family that is able to buy six months sooner because of these programs, it will be very significant,” Fleming says.

For those with weaker credit, Fleming recommends an FHA loan, which carries a 3.5 percent down payment. The FHA also recently announced a significant decrease in its mortgage insurance premiums, from 1.35 percent of a loan’s value to approximately 0.85 percent – effectively saving an average first-time buyer about $900 annually on mortgage payments.

For more on the new 3-percent down loans, visit freddiemac.com and fanniemae.com.

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