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Fannie Mae and Freddie Mac Announce 3% Down Payment Loans for First Time House Buyers

Home buying has gotten a good deal easier in the last few years. Today there are more options than in years to get a home loan with a low down payment if you are a first time home buyer. For many years FHA has been assisting new home buyers with affordable mortgages and only 3.5% down-payments being required.

It seems that Fannie Mae and Freddie Mac are simply learning from the Federal Housing Administration by rolling out a first-time home buyer program that offer low interest home loan with 3% down-payment. It is no secret that Fannie Mae home loans have been helping renters make the transition to homeownership for many years. It's also no secret that Freddie Mac loans have been a wonderful alternative for first time home buyers for several decades as well. These government home loan agencies just stepped up their game once again by backing a new home financing opportunity for first time house buyers to own real estate with only a 3% down-payment.

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Why 3% Down Home Loans Help 1st Time Buyers Make the Jump

Home buying has gotten a good deal easier in the last few years. Today there are more options than in years to get a home loan with a low down payment if you are a first time home buyer.

Last year, Fannie Mae and Freddie Mac, the biggest mortgage regulatory agencies in the US, made it possible for some first time home buyers to get a home loan with only 3% down. This is also referred to as a 97% loan to value program. It is available for some properly qualified home buyers to buy a single-family home or condominium without putting down at least 5%.

Before this critical change, it was required for Fannie Mae and Freddie Mac mortgage customers to put down 5%. Today, with only 3% down options available, this is even a lower down payment option than FHA loans, which require at least 3.5% down. Even though this isn't a no money down home loan, 3% down is very realistic for many house buying prospects.

FHA loan rates are low and the credit criteria is flexible, but they have higher upfront fees and permanent mortgage insurance that can only be cancelled if you refinance out of the FHA loan once you have at least 20% equity.

For many first time home buyers, the new Fannie and Freddie 3% down program is a very good bet because it does not require up front mortgage insurance and the PMI payment can be cancelled. Inquire about what is needed for mortgage -pre-approvals in 2017.

home loan down payment

3% Down Fannie and Freddie Lending Criteria

This new 3% down loan is similar to many current conventional loan programs. Some of the major characteristics of the Fannie Mae and Freddie Mac loan include:

  • It is a fixed rate loan and the rate cannot ever change.
  • The loan is for a one-unit single family home or condo.
  • At least one of the buyers may not have bought a home in the last 36 months.
  • The property is a primary residence.
  • The loan has to be for $424,100 or less.

For the typical first time buyer, these features fall into line quite well with the needs of many people.

Credit Requirements on Home Loans with 3% Down Payments

Many first time home buyers may think that they have to have high credit scores to qualify for conventional financing with this Fannie and Freddie 3% down program. This is not true. A borrower today may qualify if their credit score is as low as 620.

Plus, borrowers may be able to get a 3% down loan even with that lower credit score. In the past, one had to have 20% down to get a conventional loan with a credit score below 680.

For example, today a borrower putting down 20% with a FICO score of 660 will have a rate that is approximately 3/8 of a point higher. A borrower who puts down just 3% will get the very same rate.

How does that make sense? Because mortgage insurance removes much of the risk for Fannie and Freddie as well as the lender. If you do not pay your loan, the mortgage insurance company will pay off the owner of the loan. Just note that a 3% down mortgage will require private mortgage insurance.

The mortgage insurance does make the 3% down loan more expensive each month. But on the plus side, the down payment is much lower. This is a reasonable price to pay in our view as it allows the buyer to buy a home much sooner.

Also, mortgage insurance for a Fannie or Freddie backed home loan can be cancelled after you get at least 20% equity. First time home buyers who get a 3% down loan get a very low-down payment, low rate, easy credit qualification and can cancel PMI after they hit 20% equity.

The rates for this new 3% down program have rates only about 1/8 to of a point greater than when you put down 5%. While that will make the monthly payment a bit pricier, you still will be able to reduce your upfront costs by several thousand dollars when the loan closes.

Below are some more things to know about the 3% down program:

  • You can get a financial gift to pay for your closing costs and down payment. There is no minimum amount required for you to put towards the purchase yourself.
  • You do need to have not owned a property in the last three years.
  • You do not need to search for a PMI provider yourself; your Fannie or Freddie approved lender will provide it for you.
  • Mortgage insurance typically costs from $75 to $125 per every $100,000 that is borrowed.
  • Your maximum debt to income or DTI ratio will depend upon your credit profile. Most lenders have established a 43% DTI as the maximum.
  • The 3% down program may be used to refinance an existing Fannie or Freddie loan too.
  • This program is only for first time home buyers.
  • No Closing Cost Mortgage

The new 3% down Fannie and Freddie loan program is a better deal that the also great FHA loan program. Check with your lender to see if they have this 3% down-payment loan available and if you qualify.


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