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Freddie and Fannie Cutting Payments for Some Homebuyers

Freddie and FannieFor potential homebuyers short on down payment money, Freddie Mac and Fannie Mae could make be the answer. These two lending giants revealed guidelines today specific to home loans with down payments as low as 3%. This new program is primarily for first-time homebuyers but could benefit others as well.

As outlined, the approach is two-fold, improving access to credit and ensuring safe and responsible practices of lending. One of the criteria is that the loan must be a fixed rate. In addition, the home has to be the primary residence of the borrower.

Specific to Fannie Mae, one borrower must be a first-time buyer. This means the individual cannot have owned a home within the last three years. Then for Freddie Mac, low down payments are being accepted for any borrower but only if underwriting standards are met. Another requirement for Freddie Mac is that borrowers are mandated to complete credit counseling whereas for Fannie Mae, this rule is case specific.

Currently, Fannie Mae has a 3% down payment option but for this loan, it has to be secured with a lender who has interest in the program. Brian Moynihan, CEO with the Bank of America stated at a November conference that his bank would not participate and that unless a borrower could put down 10%, renting was probably a more viable option. However, his statement came prior to Freddie Mac and Fannie Mae guidelines being announced.

Although both of these mortgage lenders are huge, Fannie Mae is somewhat larger. Through this new program, Fannie Mae will offer an option for cash out refinance but only on their existing loans. The cash out amount must be the lesser of 2% or $2,000 of the loan amount, which is designed to help with closing costs. In comparison, no refinance option like this is being offered by Freddie Mac.

Another aspect of the program is the FICO credit score. For Fannie Mae, the cutoff is 620 whereas for Freddie Mac, it is a little higher at 660. However, in both cases, the FICO score is subject to compensating factors. In other words, if a potential homebuyer has a lower credit score, additional assets would be considered to reduce risk.

There is no question that these lower down payment loans are in response to consumers concerned over tight credit but also, overwhelming demand specific to people buying a home for the first time.

The challenge for this group of buyers, which accounts for roughly 40% of the market, is that income growth has not kept up with the increasing cost of homes. Then with the price of rent climbing, trying to save for down payment can be nearly impossible.

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