The 3% Home Loan Down Payment is Back

Saving for a down payment on a home loan can take years, especially when most lenders want a minimum of ten percent down. That’s still a lot less than the 20% which used to be normal. This makes the dream of owning a home out of reach for many Americans. As a result, there’s excessive inventory and a buyers’ market in most of the country. Under the current circumstances, the government has usually stepped in to try and right the ship.

Until now…Freddie Mac and Fannie Mae have announced that the three percent down payment is back. So if you can’t quite save up ten to twenty percent, you are in luck. Like most programs, no one really knows how long this one will last.

To take advantage of the program while it’s here may be easier said than done. It appears that with the resurgence of the loan backed by Fannie and Freddie, there are tighter requirements to protect both agencies, and with good reason.

For starters, this is only available for those who have good credit. If your credit score is below 620, they will not allow you into the program. Be sure you know what your score is before walking into an institution. There are plenty of places to check your credit score, many of them free of charge.

On top of a relatively decent credit score, the loan must be through a private lender, and the applicant must have full documentation of work, salary and assets. If that wasn’t secure enough, the added catch of premium mortgage insurance might turn some buyers away. Even with mortgage interest rates still low, mortgage insurance can bump a payment up by as much as two hundred extra dollars a month.

This isn’t to discourage first-time home buyers and those looking to refinance. In fact, just the opposite. The new program is designed to assist in helping those just out of reach of a home loan at the moment. Fannie will begin backing the lower down payment mortgages on December 13, 2014, and Freddie will follow in March 2015.

The program may entice many first-time buyers to jump into the market knowing that they no longer need to save a large down payment to qualify for a loan. As with the previous loan programs, anything purchased with an FHA loan is slightly more expensive. The interest rate is taken up 1.5 to 2 points to include mortgage insurance for the life of the loan.

With the new program, mortgage insurance can be dropped after the principle left on the loan drops below eighty percent of the value. Cancelling this insurance could potentially save new homeowners tens of thousands of dollars over the life of the loan.

(Photo courtesy of Dan Moyle)