Fannie Mae, Freddie Mac unveil new low-down-payment plans

The nation's two mortgage giants launch separate programs that require borrowers to make a mere 3 percent down payment in order to buy their first home.

Q. I heard a short radio report the other day that more banks are going to start offering mortgages that require a down payment of only 3 percent. This would be great for me because my credit score is good and my income is steady, but I don't have a lot in savings because so much of my take-home pay is eaten up by rent. Do you have any details about these new programs?

A. Sure. The new, 3 percent down programs were announced by mortgage giants Fannie Mae and Freddie Mac on Dec. 8 and could provide a shot in the arm for a housing market that has recently shown signs of slowing.

I'm devoting this entire column to answering some common questions about the new programs.

Q. What are Fannie Mae and Freddie Mac?

A. They are two quasi-government agencies that play key roles in the nation's housing market. They don't loan money directly to borrowers, but instead purchase existing mortgages from lenders, pool them, and then sell shares in those pools to investors.

This complicated process provides independent lenders the cash they need to make new loans to future buyers and refinancers. Today, Fannie and Freddie own about half of all the mortgages in the United States.

Q. How do the new 3 percent down plans work?

A. With a few exceptions, they basically work the same. Both require borrowers to demonstrate they have the ability to pay the money back, have a decent credit score (likely around 640 or higher), and meet other stiffened eligibility requirements that weren't always applied when the banking meltdown began about a decade ago.

At least one of the borrowers who sign the mortgage application must be a first-time buyer or, at least in Fannie's case, may not have owned a home in the past three years. Both say the loans can only be used to buy a single-family home or condo that will be used as the borrower's principal residence. And, both will require borrowers to buy private mortgage insurance - commonly called PMI - which will reimburse the lender for some or all of its losses if the loan goes into default.

Q. Are the programs available immediately?

A. Fannie's plan, called My Community Mortgage, became available Dec 13. Freddie's program, named Home Possible Advantage, won't be rolled out until next spring.

Q. My parents have offered to give me some money toward a down payment on my first house. Could I use the money and still qualify for one of these new plans?

A. Yes, both programs permit the use of so-called gift funds, whether the funds come from a relative, nonprofit group or most other sources.

Q. Why are these plans needed now?

A. Primarily because raising a down payment has become the No. 1 obstacle that prevents renters from buying a first home. A Federal Reserve study released earlier this year found that 45 percent of renters delayed buying a home because they couldn't afford a down payment - a far higher percentage than those who said their income or credit score has been holding them back.

Moreover, first-time buyers now account for a mere 29 percent of all home sales today - the lowest level in 27 years. Strong demand for the relatively inexpensive homes that most first-timers buy "trickles up" into price gains and sales for costlier homes.

Q. Doesn't the FHA already offer 3 percent down loans?

A. Yes, the Federal Housing Administration has offered such low-down-payment mortgages for years. But rates on those FHA loans are higher than those on the new Fannie and Freddie mortgages because the FHA accepts borrowers with much lower credit scores.

Borrowers with higher scores may get a lower rate and save tens of thousands of dollars over the life of their loans if they can qualify for one of Fannie or Freddie's new mortgages instead.

Q. Aren't these new programs just a rehash of the same low-down-payment plans that helped cause the banking crisis several years ago?

A. Some members of Congress think so. But the director of the Federal Housing Finance Agency, which oversees Fannie and Freddie, says the tighter loan-underwriting requirements of the new programs will help to avoid another crash.

Q. Where can I get more information?

A. The websites operated by Fannie (www.fanniemae.com) and Freddie (freddiemac.com) provide detailed information about the new programs. Local lenders and mortgage brokers also may be able to help.

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© 2014, Cowles Syndicate Inc.