Following months of talk and speculation, both Fannie Mae and Freddie Mac announced on Monday they will begin allowing qualifying first-time borrowers to purchase homes with just a 3 percent down payment.
By lowering the down payment down to 3 percent, leaders from the GSEs and the Federal Housing Finance Administration (FHFA) hope to increase homeownership and particularly household formation by offering loans to those who can afford mortgages but lack resources to make a 20 percent down payment plus closing costs.
Those who have pushed for the lower down payment, such as FHFA Director Mel Watt, have endured criticism from lenders due to the perceived risk involved with making a mortgage loan such a high maximum loan-to-value ratio.
"These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices," Watt said in a prepared statement. "To mitigate risk, Fannie Mae and Freddie Mac will use their automated underwriting systems, which include compensating factors to evaluate a borrower’s creditworthiness. In addition, the new offerings will also include homeownership counseling, which improves borrower performance. FHFA will monitor the ongoing performance of these loans."
Freddie Mac has announced the launch of Home Possible Advantage, which is an affordable, conventional mortgage with a maximum loan-to-value ratio of 97 percent to qualified low- and moderate-income borrowers. Home Possible Advantage mortgages can be used either to buy a single unit property or for a "no cash out" refinance of an existing mortgage, and they are available as 15-, 20-, and 30-year fixed rate mortgages.
In order to qualify for a Home Possible Advantage mortgage, first-time homebuyers must participate in an approved borrower education program, such as CreditSmart offered by Freddie Mac.
"Home Possible Advantage gives qualified borrowers with limited down payment savings a responsible path to homeownership and lenders a new tool for reaching eligible working families ready to own a home of their own," Dave Lowman, EVP of Single-Family Business at Freddie Mac said. "Home Possible Advantage is Freddie Mac's newest effort to foster a strong and stable mortgage market."
Likewise, Fannie Mae is now offering mortgage loans with a maximum 97 percent LTV ratio to qualifying first-time homebuyers. Such a mortgage can be obtained through Fannie Mae with a 3 percent down payment under Fannie Mae's standard offering or its My Community Mortgage Product if one of the co-borrowers is a first-time homebuyer.
In addition, homeowners with an existing Fannie Mae mortgage who are not eligible for the Home Affordable Refinance Program (HARP) can refinance their loan up to the level of 97 percent LTV if they meet eligibility requirements.
"Our goal is to help additional qualified borrowers gain access to mortgages," said Andrew Bon Salle, Fannie Mae Executive Vice President for Single Family Underwriting, Pricing and Capital Markets. "This option alone will not solve all the challenges around access to credit. Our new 97 percent LTV offering is simply one way we are working to remove barriers for creditworthy borrowers to get a mortgage. We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers."
In order to mitigate risk and ensure the loans Fannie Mae acquires are properly underwritten, the company has implemented practices that include requiring income documentation and verification and eliminating risk-layering on purchase money loans.
Fannie Mae reported in its announcement regarding the new loan guidelines that private capital will be in the first loss position. Mortgage insurers and other risk sharing partners must conclude that the lower down payment loans are prudent in order for them to be originated and sold in the secondary market to Fannie Mae. Also, whereas some lenders have tightened mortgage availability due to uncertainty around the circumstances that would result in a loan repurchase request, Fannie Mae is working to provide lenders with greater clarity regarding these requests.
Also, to help better evaluate risk on loans, Fannie Mae is offering new tools to lenders, such as Collateral Underwriter, which will be available early in 2015. It is the same appraisal review tool that Fannie Mae uses and will be available to Fannie Mae's customers at no additional charge.