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Freddie and Fannie Reducing Down Payments for Buyers

01/26/2015

Freddie Mac and Fannie Mae may be the answer for some homebuyers low on money for a down payment. Guidelines were recently revealed whereby down payments will drop to as low as 3 percent primarily for first-time homebuyers but there are others that could benefit too.

According to the latest real estate news, the approach taken by these two giants is to ensure responsible and safe lending practices and to improve access to credit. In order to qualify there is set criteria in that it must be a fixed rate loan and the home has to be the borrower’s main residence.

For Fannie Mae, if there is more than one borrower, at least one of the individuals has to be a first-time buyer, meaning that person cannot have been a homeowner for at least three years. Pertaining to Freddie Mac, low down payments apply to any borrower as long as the individual meets underwriting standards. In addition, Freddie Mac borrowers have to complete credit counseling whereas this rule for Fannie Mae is case specific.

While Fannie Mae requires a 3 percent down payment, the loan must be with a lender that holds interest in the program. In a statement from November’s conference, Brian Moynihan, CEO with Bank of America confirmed that his bank was not a participant and added that if someone was unable to make a 10 percent down payment then renting was probably a better choice. However, his statement was made prior to the guidelines being revealed by Fannie Mae and Freddie Mac.

Of the two lenders, Freddie Mac is somewhat smaller. With this new program, an option for cash out refinance is being offered by Fannie Mae but this applies on existing loans only. The amount of cash out has to be lesser of 2 percent or equal to $2,000 of the amount of the loan. This is designed to ease the financial stress associated with closing costs. For Freddie Mac, there is no refinance option being offered.

The FICO credit score is yet another factor of the program. Fannie Mae sets the cutoff at 620 whereas for Freddie Mac it is 660. Regardless, there are compensating factors involved. As an example, if a potential buyer scores lower, to reduce risks of the loan other assets might be taken into consideration.

These loans with reduced down payment are in response to concerns that consumers have specific to tight credit but in addition, increasing demand by people who are first-time buyers.

The challenge faced by both groups of buyers, which is about 40 percent of the market, is that growth of income is not keeping up with the increasing price of homes. Another challenge is trying to save the down payment considering that rent prices are also rising. However, the program being offered by Freddie Mac and Fannie Mae will open the door for many people to finally become homebuyers, a goal that perhaps looked out of reach prior to the guidelines being unveiled.

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