Are you looking for a mortgage that features a low down payment but can’t find a suitable conventional loan because of various restrictions? The Federal Housing Administration (FHA) offers loan products with down payments of just 3.5% for borrowers with FICO credit scores as low as 580 – an attractive combination for potential homebuyers with lesser credit that are struggling to come up with a sufficient down payment.
However, the FHA faces increasing competition for the low-down-payment mortgage market. The government-sponsored enterprises Fannie Mae and Freddie Mac are increasing their push into this market with new loan programs that allow certain borrowers to purchase homes with only a 3% down payment.
Freddie Mac already offered 3% down mortgages under the Home Possible program designed to help low-income borrowers. The program features optional down payment sources such as family contributions and employee-assistance programs, along with income flexibility featuring no income limits in underserved areas.
To expand their offerings, Freddie Mac’s new HomeOne program complements the Home Possible program by focusing on first-time homebuyers and removing geographic or income restrictions within that segment. Meanwhile, the Home Possible program was altered to increase the focus on lower-income borrowers by capping income limits at 100% of the median income for the area in certain locations (such as specific areas designated as high-cost or disaster areas).
Fannie Mae’s 3% offering is the Home Ready program. It also targets lower-income borrowers without the means for larger down payments, allowing non-traditional income sources such as rental payments or non-occupant co-borrowers. The program requires a 620 FICO credit score and is subject to income limits in various areas. Income limits may be waived for first-time homebuyers.
All three programs have subtle qualification differences – the homes and locations to which they apply, homebuyer education requirements, first-time homebuyer status, occupancy requirements, and flexible borrower contribution possibilities. Discuss the pros and cons of each option with your lender to find the best fit for your situation, and also consider the FHA or VA path if you qualify for one of these loans and still can’t meet the requirements for a conventional loan.
Potential borrowers that are on the edge of qualification are being squeezed in multiple directions. Home prices have been rising across the country due to high demand and low supply of starter homes, making it very difficult for first-time homebuyers to find an affordable new home and secure financing. Interest rates are still low in historical terms but continue to rise, while wages remain relatively flat.
All these forces work against low-income and/or first-time homebuyers, creating a lending demand that Fannie and Freddie are trying to fill. Both agencies are attempting to lower loan qualification levels in creative ways – trying to open the market without returning to the days of irresponsible lending practices.
While Fannie and Freddie’s new loan products give homebuyers at the edge of the market more opportunity to afford a home, they also provide an opportunity to overreach. Before considering a low-down payment mortgage loan option, take a realistic look at your finances. Can you absorb this much debt without putting you too close to the financial edge, where one unexpected financial burden can spell disaster?
We may not be in the freewheeling days prior to the housing crisis when anyone with a pulse could get a loan, but lenders can still allow people to borrow more money than they should. Know what you can afford, and don’t be afraid to put off homeownership until you’re in a better financial position.