In an effort to open up lending to more low-income and first
time home buyers, Fannie Mae and Freddie Mac announced Monday that they will
start backing mortgages with down payments of as little as 3% of the home's
price. But borrowers will still need to meet strict criteria first, the two
government-backed mortgage giants said.
The new loans will only be doled out to those who buy
private mortgage insurance, have a credit score of at least 620 and offer
complete documentation of their income, assets and job status. And, to further
mitigate risk, the agencies will require borrowers to receive home ownership
Both programs are for fixed-rate loans given to first time
homebuyers and those seeking to refinance. Fannie will start backing the loans
as soon as December 13, while Freddie will start offering them March 23.
The move should expand access to credit for first-time
homebuyers, 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 insures 3.5% loans.
Still, according to Mark Palim, who directs economic and
strategic research at Fannie Mae, it's a welcome expansion of credit. The 3%
loans from Fannie and Freddie should also offer some advantages over the 3.5%
down loans offered by FHA.
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
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, these borrowers may be able to cancel their insurance and
save them tens of thousands of dollars over the next 26 or 27 years.
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