Low Down Payment Mortgages Back For Buyers

Dated: January 13 2015

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Potential home buyers who don't have a lot of cash to put down now have a cheaper way to get a loan. Mortgage giants Fannie Mae and Freddie Mac announced guidelinesMonday for loans with down payments as low as 3 percent under a new programlargely aimed at first-time homebuyers. "These underwriting guidelines provide a responsibleapproach to improving access to credit while ensuring safe and sound lending practices,"said Federal Housing Finance Agency Director Mel Watt in a release.The loan must be fixed rate, and the home must be a borrower'sprimary residence, so this would not apply to investors, according to FHFAofficials on a conference call with reporters Monday morning. At Fannie Mae, atleast one of the borrowers on the loan must be a first-time homebuyer, definedas not having owned a home in the past three years. Freddie Mac is allowing thelow down payment loan for any borrower who meets its underwriting standards.  Full documentation of a borrower's income and credit history isrequired, as is mortgage insurance. Freddie Mac will require credit counselingfor its borrowers, while Fannie Mae will in certain cases.Fannie Mae has a 3 percent down payment product already throughstate housing finance agencies, but this loan may go through any lenderinterested in the program. At a conference in November, Bank of America CEOBrian Moynihan said his bank would not participate in a low down paymentprogram and reportedly suggested that if borrowers didn't have 10 percent toput down, they should probably rent. That was before these details wereannounced."[Mr. Moynihan] made those comments several weeks ago as abroad characterization," said Bank of America spokesman Terry Francisco onMonday. "We will evaluate this program."Fannie Mae, which is significantly larger than Freddie Mac, willalso offer a cash-out refinance through the program, but only on existingFannie Mae loans, and the amount of the cash out is limited to the lesser of 2percent of the loan or $2,000. It is designed to help cover closing costs only.Freddie Mac is offering a no cash-out refinance.Fannie Mae's minimum FICO credit score cutoff is 620, whileFreddie Mac's is 660, but both are subject to so-called, compensating factors,so if a borrower has a credit score on the low side, he or she may need to showmore assets to mitigate the added risk.The move to offer these low down payment loans is clearly inresponse to an industry cry that credit is too tight and stifling demand fromfirst-time homebuyers. These buyers, usually up to 40 percent of the home buyingmarket, have been stuck at less than a third of today's market. Income growthhas not been keeping pace with rising home prices, and as rents continue torise, potential buyers are having a much tougher time saving for a large down payment.Fannie Mae will allow these loans starting Dec. 13, whileFreddie Mac will begin underwriting for loans with settlement dates beginningMarch 23, 2015.

Author: Diana Olick CNBC's Real Esate Correspondent

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