Fannie Mae and Freddie Mac introduce 3% mortgage downpayment programs

If you’re struggling to come up with 20% to put down on a home, two of the nation’s largest mortgage clearinghouses have new programs that could put you in the home of your dreams sooner than you might expect.

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The return of the 3% down mortgage: A good or bad thing?

Fannie Mae and Freddie Mac are both government-sponsored entities that lend money to banks to make mortgages and also buy mortgages back from lenders. Behind the curtains, they're basically the clearinghouses that make the mortgage world go round.

Now both Fannie Mae and Freddie Mac are easing credit standards and offering super-low down payment mortgages through their HomeReady and Home Possible programs, respectively.

Here’s a look at the criteria for both the Fannie and Freddie programs.

Fannie Mae HomeReady program

  • No income limits if you're a first-time homebuyer
  • Requires a credit score of 620
  • Mortgage insurance can be cancelled when you reach 20% equity in your home
  • Income can come from owning home as rental property

Freddie Mac Home Possible program

  • No income limits in underserved areas
  • Requires a credit score of 640
  • Mortgage insurance can be cancelled when you reach 20% equity in your home
  • Primary residence only

Both the Fannie and Freddie programs compete with FHA loans. However, they differentiate themselves from the FHA offering because that loan requires a higher 3.5% down payment while simultaneously having a lower credit score requirement of 580.

Meanwhile, did you know that many Americans on the lower end of the credit spectrum recently enjoyed a surprise bump in credit score? Find out why here.

Clark’s take

Now, let’s get down to brass tacks: Is it a good idea to get 97% financing — in other words, bringing only 3% to the table — in order to get into a home?

You’d probably expect money expert Clark Howard would be vigorously opposed to the new 3% downpayment HomeReady and Home Possible loan programs. But the consumer champ struck a contrarian note with his take during a recent radio broadcast.

While he acknowledged fears that a broad loosening of lending standards could lead to a repeat of last decade’s housing meltdown, Clark said he’s not worried about that happening this time.

“There are such significant differences with the new 3% down mortgages that I’m not freaking out,” he noted.

Clark went on to say that the greatest cause of the meltdown last decade was that banks had incentives in the marketplace to push out loans and sell them off to unsuspecting investors, regardless of whether the paper they were writing was good or not.

“That’s what lead to the meltdown. The scandalous, dirty, rotten, terrible and crooked behavior of the banks — not having the opportunity for somebody to buy a home with a 3% downpayment.”

So if you are someone who is struggling to save for a traditional 20% downpayment to avoid paying mortgage interest, you may now qualify for one of these 3% loans. However, there one caveat Clark offers…

“You really need to [come to the table with] beyond 4% because of the costs involved with closing on a house — even if it only requires a 3% downpayment,” the consumer champ says.

To put that in real numbers, let’s consider a $200,000 home purchase financed through either HomeReady or Home Possible. You only have to bring $6,000 to the table to meet the 3% downpayment requirement, but Clark advises having $8,000 on hand to deal with fees. That way your purchase can go off without a hitch!

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