Mortgage loans with down payments of as little as 3 percent will be allowed through a pair of new programs announced this week by Fannie Mae and Freddie Mac.

The new loan options are targeted at first-time homebuyers and borrowers with low-to-moderate incomes, though other types of borrowers may be able to qualify for one or the other. Refinancing options are being included as well.

"The new lending guidelines released today by Fannie Mae and Freddie Mac will enable creditworthy borrowers who can afford a mortgage, but lack the resources to pay a substantial down payment plus closing costs, to get a mortgage with 3 percent down," said Mel Watt, director of the Federal Housing Finance Agency, which oversees Fannie and Freddie. "These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices."

One starts now; the other later

Loan applications under the Fannie Mae program are being accepted immediately; the Freddie Mac program will not be launched until March 2015.

The new down payment guidelines undercut the FHA's 3.5 percent minimum, until now the lowest down payment available to the general public (VA loans allow 0 percent down). Because the costs associated with Fannie Mae and Freddie Mac mortgages tend to be lower than on FHA home loans, the new offerings may prove a more attractive option for those seeking minimal down payments. However, FHA credit requirements are less restrictive than for mortgages backed by Fannie Mae or Freddie Mac.

The two new programs are limited to the purchase of single-unit homes to be used as a primary residence by the borrower. Manufactured housing (mobile homes) are not eligible. Borrowers will also be required to pay for Private Mortgage Insurance (PMI), as is required on any mortgage with less than 20 percent down, at a monthly cost of about $40-$80 per $100,000 borrowed.

What Fannie Mae's offering

While the two new loan programs share many similarities, there are key differences as well. For purchases, the Fannie Mae program is limited to first-time homebuyers, though with no restrictions on income.

It can be used as for refinancing by low-equity borrowers who can't qualify for the Home Affordable Refinance Program (HARP), but only if their current mortgage is already backed by Fannie Mae. There is a limited cash-out option that can be used to roll closing costs into the loan, but not to actually take out money as part of the transaction.

Borrowers with low-to-moderate incomes - up to the median income in most areas, somewhat higher in certain others - can use the 3 percent option in connection with Fannie Mae's previously established MyCommunityMortgage program. That program provides for discounted private mortgage insurance and allows borrowers to avoid the higher interest rates that are normally charged to customers with lower credit scores and smaller down payments.

Published on December 11, 2014