3% down Conventional - It's official!
Fannie Mae has announced it is now accepting applications and funding 
the long-awaited 3% down conventional loan. As with any announcement, they let you know what the program is, but it's up to us to dig in for the details - that's what I'm here for!
- The 3% down program can be used for the purchase of a single family home, condo, or COOP with the 30 year fixed rate program only. (Manufactured homes are not eligible, and ARM loans cannot be used)
- 1st time home buyers can put 3% down under both the standard conventional loan guidelines AND Fannie Mae's "My Community" program.
- Approval through automated underwriting is required (no manual underwriting approvals)
- For refinances, a borrower can use the 3% equity guidelines ONLY if refinancing a loan that is currently owned by Fannie Mae (Loan officers can use the same website they've used the past few years to check Fannie Mae's ownership records for the HARP program)
- Program is only available to first time home buyers*** (if there are multiple borrowers, at least one must be a first time buyer) OR home owners who already have a fannie mae loan in the case of a rate/term refinance.
***Fannie Mae defines a first time buyer as someone who has had no ownership interest in a home within the past 3 years
Other highlights
- down payment sourcing guidelines are exactly the same as 5% down loans, meaning the entire 3% down payment can come from a gift, grant, or acceptable 2nd lien
- No increased underwriting scrutiny. 3% down loans for first time buyers will be viewed exactly the same as 5% down loans
Lowlights
- When putting just 3% down, PMI payments can be substantially greater, even for borrowers with great credit.
- Since this program has just resurfaced, it's in what I call the "guinea pig" phase. Data will be reviewed based on product performance, and tweaked. If it's successful, my guess it that more options will become available to borrowers in the future (more eligible property types, ARM options, etc).
Is this as good as it sounds?
Yes and no. It is great to see Fannie Mae addressing a major barrier to home ownership, which is the ability to save for a down payment. The downside to that is a lack of assets and reserves is also a major reason for foreclosure and financial woes among homeowners (if you can't save for a down payment, good luck getting together your emergency fund when you need a new roof and a new water heater in the same couple months).
The cost of PMI at 3% down is also somewhat prohibitive, but hopefully as this program makes a comeback, those costs will come down. This program will not be a success without the PMI companies playing along. Fannie Mae has determined there is negligible difference between 3% down and 5% down when it comes to risk, but according to the PMI pricing, the mortgage insurance companies don't agree. Again though, this program just came back today, so pricing changes in the very near future are a possibility. As it stands, PMI pricing on the 3% down program actually makes FHA look like a decent program - and if you follow my blog, you know I'm not a fan of FHA in its current form.
Overall, it's great to see Fannie Mae coming up with ways to bring more buyers to the market and make home financing more attainable. There are better steps that could have been taken, in my opinion, however a step in the right direction is a good start. There are potential buyers out there who will benefit from the reduced down payment requirement, and I look forward to helping them obtain financing.
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