Mortgage giants Fannie Mae and Freddie Mac announced that first time homebuyers can now in fact put as little as 3% down and get conventional financing (no longer confined to the FHA only box). There are no prohibitive restrictions; in fact if two people are buying a home, only one of them need be a first time buyer. Standard FannieMae underwriting guidelines and standard PMI coverage and costs apply. This is a significant mortgage financing event and should bring more first time buyers into the active homebuyers’ pool.
Freddie Mac launched Home Possible Advantage, a conventional mortgage with a 3 percent down-payment requirement geared to low- and moderate-income borrowers. It's a conforming conventional mortgage with a maximum loan-to-value ratio of 97 percent. To qualify, first-time homebuyers are required to participate in a borrower education program.
With Fannie Mae's 3 percent down-payment offering, borrowers must still meet standard eligibility requirements, including underwriting, income documentation, and risk management standards. Any buyer can take advantage of Fannie's loans as long as at least one co-borrower is a first-time buyer. The loans will require private mortgage insurance.
Up until now, first time homebuyers with a limited down payment primarily had the option of HUD insured FHA financing. As FHA mortgage insurance (MIP) costs have risen to new heights in the last few years, consumers in this market segment have stepped back to try and secure conventional financing. Expensive FHA upfront and monthly mortgage insurance made the economics of low down payment mortgage financing prohibitive.
What’s really exciting about the new 3% down payment conventional mortgage financing is that conventional financing does not tie borrowers to mortgage insurance forever like FHA MIP does. Once equity targets (20% – 22%) are reached, current appraisal supported value can eliminate conventional PMI (Private Mortgage Insurance). This is not the case with FHA MIP, once you get it, the only way to get rid of it is to refinance out of the FHA loan or sell the house. Don’t forget about that upfront FHA MIP insurance, which is 1.75% of the loan amount. So a $200,000 FHA loan would actually start at $203,500 ($3,500 for the upfront MIP). Conventional PMI (Private Mortgage Insurance) has no upfront PMI.
If you were a first time homebuyer with a limited amount of money for a down payment, which would you choose?
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