Obtaining A Conventional Mortgage Loan With A 3 Percent Down Payment
Two relatively new programs offered by the Federal Housing Finance Agency (FHFA)have resulted in lower down payment requirements for some conventional mortgages. Prospective home buyers can now obtain a conventional home loan with a down payment of as low as 3 percent.
The FHFA is the oversight agency for both Fannie Mae and Freddie Mac, the two quasi-governmental agencies that purchase home mortgages. Although private lenders initially provide loans to borrowers, the two agencies typically purchase the loans and free up the funds once again for the private lenders. To be eligible for purchase, the loans must meet specified criteria of Fannie Mae or Freddie Mac.
In December of 2014, Fannie Mae lowered its minimum down payment requirement to 3 percent. Freddie Mac then also made a 3 percent down payment option available. Although the minimum down payment requirement is the same for both agencies, their mortgage options differ slightly.
Fannie Mae
The Fannie Mae program requires at least one of the borrowers to be a first-time home buyer. For purposes of the agency, a first-time home buyer is defined as someone who has not owned residential property in the last three years. The property must be a single-unit residence but not a manufactured home. A refinance option is available with limited cash-out.
Freddie Mac
The Freddie Mac program is not limited to first-time home buyers, but it does have income restrictions. Your earnings must not be more than 100 percent of the median income in your area. The Freddie Mac option is available to current homeowners seeking to refinance, as long as there is no cash received. If you are a first-time home buyer, Freddie Mac requires participation in a borrower education course.
The 3 percent down payment option does not apply to adjustable-rate mortgages for either agency, so your interest rate must be fixed. Neither program is intended for a second home or a rental property.
Because of the low down payment, both programs create the need for private mortgage insurance. Conventional loans require private mortgage insurance if your equity level is less than 20 percent. Along with mortgage interest, private mortgage insurance may be tax-deductible. Once your equity level exceeds 20 percent, private mortgage insurance can be canceled.
The down payment for either agency can come from a grant or from family members. Loan approval is based on your credit history and your ability to make ongoing payments. Contact a loan specialist, like FCN Bank, for more information about conventional mortgage loans.