On December 8, Fannie Mae and Freddie Mac announced programs allowing for a down payment requirement as low as 3% toward the purchase of a home. The announcements are an attempt to entice more first-time home buyers into the market.
Fannie Mae’s program, My Community Mortgage, allows down payments as low as 3% for first-time home buyers on fixed rate mortgages. At least one of the borrowers must be a first-time home buyer, which is defined as not having owned a home in the past three years. In addition, the program permits homeowners with Fannie Mae-owned mortgages who do not qualify under the Home Affordable Refinance Program (HARP) to refinance their loan up to the 97% loan-to-value (LTV) level under a limited cash-out option designed to cover closing costs.
Home buyers and homeowners participating in Fannie Mae’s program must meet the same eligibility requirements as other Fannie Mae-owned mortgages, including underwriting, income documentation and risk management standards. Borrowers must have a credit score of at least 620 to qualify for the program and must also purchase private mortgage insurance.
Freddie Mac will launch its own initiative, the Home Possible Advantage program, on March 23. It will offer the same 3% down option as Fannie Mae. A no cash-out refinancing is also available as part of the program. It will be limited to people who have never owned a home, those with moderate incomes, or buyers in under-served areas.
All home buyers meeting Freddie Mac’s underwriting standards are eligible for the program. Borrowers must have a minimum credit score of 660, verify their income, and participate in credit counseling. Fifteen-, 20- and 30-year fixed rate mortgages are available. The announcements by Fannie and Freddie are a response to concerns that current lending standards are discouraging first-time home buyers from entering the market. Historically, first-time home buyers have represented 40% of all home buyers. However, according to the National Association of Realtors, they represented only 33% of the market in 2014, the lowest share since 1987.
A lack of first-time home buyers appears to be affecting the overall housing market. According to the U.S. Census Bureau, for the third quarter of 2014 the national home ownership rate was 64.4%, its lowest level in 19 years.