3% Down Payment Loans are Back!!

The following is an excerpt from a newsletter published by HSN.com:

“Last week, FHFA announced the details of how Fannie Mae and Freddie Mac will again start to purchase loans with as little as 3 percent down. At least one industry website called it a “game changer”, but the reality is probably not. Although Freddie stopped backing 97 percent loans a number of years ago, Fannie was doing them up until November 2013, arguably with limited effect. The new availability of these products should be in the market as early as next week, but we don’t expect any huge rush or surge of business for them.

These will compete effectively against FHA-backed loans, and their primary appeal will be a lower cost for mortgage insurance, which unlike FHA-basked loans, will also be cancelable at some point in time. Starting with only 3 percent down, that point will of course be well off into the future, especially if home price increases remain modest. This reintroduction of the My Community Mortgage (MCM) program is aimed squarely at first time homebuyers, and borrowers will need to endure a credit counseling program in order to be eligible; Freddie’s program will have income limits, too. One deterrent to lenders jumping on this bandwagon is that the lender must make available post-purchase early delinquency counseling, should the borrower fall behind in making payments, and for a period of seven years.

Although news reports said Fannie and Freddie will back these loans from borrowers with FICO scores as low as 620, Fannie Mae documentation for the MCM suggests FICO 660 or FICO 680 may be the minimum. It also bears noting that the attraction of these loans may be tempered somewhat by market-based differences in pricing; in the current interest rate environment, even factoring for reduced risk-based Loan Level Pricing Adjustments, MCM mortgages will carry an interest rate of perhaps a half percentage point higher than that available for a comparable FHA-backed loan.”