Breaking News: Fannie Mae and Freddie Mac Drop Some Down Payment Requirements to 3%

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On Monday December 8th 2014, Fannie Mae and Freddie Mac, the nations leading mortgage buyers, issued statements that announced they will allow loans for primary residences as low as 3% down. This move was done in an effort to loosen credit and get more people into homes, though certain criteria and rules are in place to prevent another 2007.

But will it be enough?

Related: Should We Act on What We Hear in The News About Real Estate?

Fannie and Freddie 3% Details

The new 97% LTV loans will allow homeowners to purchase properties for just 3% down, a reduction from their previous requirements of 5%. Although this is only a small drop, it is the hope of these government-sponsored enterprises that by decreasing the loan amount required, more individuals will be able to purchase a home.

According to CNN, previous requirements, such as a minimum credit score of 620 and verification of stable job income, still apply to the new loan programs.

The new guidelines differ slightly between the two giants, but both allow for just 3% of the purchase price to be supplied.

Under Fannie Mae’s new guidelines, the property being purchased must be a single unit, owner-occupied property (sorry House Hackers looking for a duplex, triplex, or quad). Additionally, Fannie Mae requires that “At least one borrower must complete an acceptable prepurchase home-buyer education and counseling program” in order to qualify for this low-down mortgage. Finally, Fannie Mae requires that at least one of the applicants must be a first-time home buyer (not applicable for the refinance).

Freddie Mac’s program, called “Home Possible Advantage,” is similar to the Fannie Mae program in all these regards, though Freddie Mac only requires the education program for first-time home buyers but will lend to previous homeowners, unlike Fannie Mae.

In an official statement from Freddie Mac, Dave Lowman, Executive Vice President, Single-Family Business at Freddie Mac said, “Home Possible Advantage gives qualified borrowers with limited downpayment savings a responsible path to homeownership and lenders a new tool for reaching eligible working families ready to own a home of their own. Home Possible Advantage is Freddie Mac’s newest effort to foster a strong and stable mortgage market.

Related: The Investor’s Complete Guide to Filling Out a Successful Loan Application

Both programs WILL require private mortgage insurance, but unlike the typical FHA loan, the borrower will be able to easily drop the insurance without needing to refinance. As soon as the borrow can prove the value of the property has risen below 80% LTV, the PMI can stop.

Both programs also make the new limits applicable for refinances, though not cash-out refinances. In other words, you can refinance your primary residence up to 97% of the value, but only if you are paying off existing liens.

What This Means for YOU

So what do you think? Will this continue to prop up the current real estate market? Will this ultimately help things or hurt things?

How will this affect your business?

I’ve love to hear your thoughts below in the comments!

Photo: www.FutureAtlas.com

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

20 Comments

  1. Question Brandon-
    If I am offered a 97% loan, can I borrow the 3% down payment with a small mortgage on free and clear property I own?
    I am under contract on a bank owned single family home. I have two houses for sale, and though I have assets, am too cash poor to come up with the 3% on the FHA loan until one of these houses sells. Can I borrow from a friend- using one of my tenant houses as collateral – basically creating a short term “bridge loan” so that I can go to the closing with my 3% down payment in hand, or is this not allowed? I am afraid to ask… but I surely don’t want to be involved in any mortgage fraud.

  2. Brian Gibbons

    Well I beat you! Posted it in the news section yesterday!

    Here is what Creative Real Estate Investors should do NOW!

    Blog about home ownership.

    Write about the 2 deals from FHA and FHFA, they are a little different.

    Then find expireds that did not sell due to little equity. BE CAUTIOUS OF UPSIDE HOUSES.

    Then…

    Buy on sub2 from seller.
    Sell on Lease w ROFR (right of first refusal), charge first and last plus 2% fee for ROFR.
    See https://www.biggerpockets.com/forums/83/topics/151273-mls-rent-to-own-structure—motivated-seller?page=1#p1083897
    Have agreement with renter that ROFR fee will returned if they get approved for financing at new appraisal in the future.

    March that “Home Owner in Training” to your small bank start a savings program, go work at Walmart to increase income 1 sat every other week. Work toward the 3%.

    If that good for you the “Investor”? Getting full retail price? You bet.

    Is that good for the Buyer – Former Renter? You bet.

    And this is better than a lease w option, no equitable interest. Just a little ol ROFR.

  3. Jay C.

    Well using your words Brandon “PROP” has never been a good thing. I think folks better start to look at the big picture. I think every borrower need have 20% down to have ample skin in the game. This protects the bank from at times over priced homes or poor appraisels that do not show good and fair vaue. Too much leway to get in trouble with 3% down.

    That said the REI investor thrives from meltdowns and folks who get in trouble. Its a bottom up indiustry as I see it.

    • It makes a certain amount of intuitive sense, right? “If they put a lot of money down, they will do everything they can to save their investment and be more motivated to pinch pennies, etc. to make those payments.” How can you argue with such straight-forward logic?

      Unfortunately, a large down payment doesn’t protect you from losing your job due to a downturn in the economy or corporate restructuring, having a reduction in household income due to spousal death or divorce, or developing major medical issues.

      For example, I met a motivated seller looking to sell who had put 40% down and six months later lost his job due to restructuring,

      If anything, his large down payment was a barrier to helping him avoid foreclosure, because he couldn’t reconcile himself with walking away from his down payment so soon after making it. He was two weeks away from auction but wouldn’t sell at a price that would allow for a flip and he wouldn’t extend owner financing without being reimbursed for his down payment so he could use it for his next purchase.

      Finally, if 20% down was required for every home sale, there would be far fewer sales. With far fewer sales, housing prices would drop significantly, causing numerous homeowners and investors to end up underwater. And with real estate being a major driver of the economy, collapsing housing sales and prices would seriously damage the economy.

      Or at least, that’s how I see things. 🙂

      i agree with the point others have made about high-integrity underwriting being a solid foundation to avoiding foreclosure crises. Make sure borrowers can actually afford the loan payments. (I would keep modest down payment requirements in place as well.)

  4. Jerry Kisasonak

    3% down and 6% seller assist screams “I am broke but want to buy a house!” I agree with Jay. This is the recipe for disaster. In spite of the efforts here, the fact is not everyone should own a home. Go to homeopath.com for further evidence.

  5. Julie F.

    I think there is plenty of inventory here in the LA Metro area, but the market is weird – some houses just sitting there, and some being bid up way too high. They key with this announcement I think is finding a way to utilize this new Owner-Occ loan for your buyers either as Brian suggests, or in some other way, like working with a lender who is going to specialize in this, or in CALIF using the CalHFA loans. The trouble, as always these recent years, will be in Qualifying for a loan. You thin that it was hard for a buyer to qualify at 80% LTV and that payment, 97% is only going to be harder. I agree, not everyone who wants a home should own one, especially if they do not have any $ to begin with.

  6. I don’t think the amount of downpayment matters too much. What matters the most is underwriting the borrower, whether the borrower has enough income to be able to afford the home. I’m a military vet, and I used a 0% down, but my salary can cover the mortgage because VA underwrites strictly. As long as underwriting is done right, anyone could own a home they want.

    In fact, default rates on VA loans are among the lowest, compared to FHA and conventional. That says a lot about VA’s underwriting guidelines.

  7. Benjie DeVera

    I don’t think the amount of downpayment matters too much. What matters the most is underwriting the borrower, whether the borrower has enough income to be able to afford the home. I’m a military vet, and I used a 0% down, but my salary can cover the mortgage because VA underwrites strictly. As long as underwriting is done right, anyone could own a home they want.

    In fact, default rates on VA loans are among the lowest, compared to FHA and conventional. That says a lot about VA’s underwriting guidelines, because it is done the right way.

  8. I agree with most everyone here- 3% down is a recipe for disaster. That being said, it will boost home prices in the short term by allowing demand to grow (more people will have access to credit because of the smaller down payment). This is a terrible gimmick that the tax payers will pay for again (we are still bailing out all the old loans that are still being foreclosed on). The good news is that if you are just barely underwater and need to sell, look for an increase in prices as long as interest rates do not rise. Homes drive a large percentage of the economy so expect the gov’t to try to get demand up along with prices. If any of you own properties that you rent, this is pretty much the same as your renter not having the security deposit and wanting to pay you as you go. If you can’t save a little money to put down on a house or for a security deposit that means your spending/saving habits need to change. That means I wouldn’t trust you with my rental. But hey, we can’t stop what the gov’t does, just be prepared to cash in when you can. Good investors count on the boom and bust cycles this stuff creates; the poor average joes just get slaughtered.

  9. Anthony Yeoman

    I agree with BENJIE. The last housing crisis was not caused by a lack of equity or cash reserves, but poor underwriting. Mortgages were being written that the borrower would not be able to make one payment on. Lowering the downpayment requirement, but keeping tight underwriting guidelines will help to stimulate homebuying. There are not many buyers (owner occupied or investor), that are sitting on large cash reserves right now, but there are quite a few that have strong, stable income.

  10. From what I can see, decent, newer homes are no longer cheap. Some areas I’m looking at are already at the 2007 price level and most of my tenants struggle to pay the rent as it is.

  11. Justin Hill

    I disagree with the implied risk of a 3% down program. Has anyone recently tried to get approved for a 5% down conventional loan? It’s probably easier to run the NYC marathon. Lenders will have something called “overlays” which are guidelines built to ensure the credit risk of the client and ultimately stave off default.

    Unlike the loans made pre 2007, these loans today are FULL documentation with large reserve requirements. (2-12 months for borrowers). In addition the mortgage insurance requirements will make the loan marginally better than FHA. Adequate down payments aren’t the issue for current homeowner’s to repurchase, it’s more-so about the break-even mark which a large majority of homeowners have still yet to hit.

  12. Brian Gibbons

    I am in the “helping people get a mortgage business.” I use rent to own and lease w a rofr to assist my renters get a mortgage.

    I am also in the “I help sellers sell on terms and maximize their equity with lowered closing costs and no commissions.”

    So I love it.

  13. Deanna Opgenort

    I would personally MUCH rather have a 3% down and keep that extra 2% in the bank as insurance against the possible/inevitable stuff. Here in SoCal each 1% is about $4-5K in most neighborhoods, so the difference is between putting down $12k vs having to come up with $20k as a downpayment (plus the $3-5k closing costs – some costs are set, some a percentage).
    Rent is so high in many places that the difference between a house payment and rent isn’t that much.

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