Mortgaging Made Easier: Down Payments Could Be Reduced to 3%

It finally appears there will be some long-awaited down payment relief for home buyers, many of whom have been blocked from the housing market since the 2008 financial crisis

Government mortgage entities, Fannie Mae and Freddie Mac, have both indicated they are seriously considering decreasing down payments to a little as three percent for first-time home purchasers. They will also consider allowing homeowners wishing to refinance to reduce equity to the same percentage to cover closing costs.

In a statement issued by the California Association of Realtors (C.A.R.), Fannie Mae and Freddie Mac was commended for expanding access to mortgages for well-qualified first-time buyers who otherwise find it difficult to enter the housing market.

“Saving enough money for a down payment is the biggest hurdle for most first-time home buyers, but this program will help remove that barrier, and at the same time, lenders can be assured they are providing a safe, affordable loan to creditworthy borrowers,” said C.A.R. President Chris Kutzkey.

But, having learned from previous too-lenient lending practices, these new ‘expanded’ guidelines’ will involve tougher debt ratios, pricier PMI (mortgage insurance) as well as enlarged reserve asset requirements.

The primary bonus of the revised parameters will be reflected in how conventional financing is competitively positioned with FHA loans. FHA Mortgage Insurance Premiums (MIP) have skyrocketed over the past three years, increasing five times for no apparent reason. Unlike PMI, which can be eliminated when equity reaches a confirmed twenty-two percent, homeowners are locked into expensive MPI for the life of their loan.

If used judiciously, these modified standards open the doors for many who’ve been unable to qualify for a mortgage. But with that said, these potential buyers will be carefully scrutinized to minimize lender’s risk and avoid a mortgage default replay of the past.