By Jesse McCarl
Last week, there was big news that federal home loan organizations Fannie Mae and Freddie Mac were approving down payments as low as 3%. The conventional thought on down payments is that they should be approximately 20% of the total cost of the home. 3% down payments obviously look considerably different.
The reactions were varied. Some people immediately put their gaurds up: Wasn’t it stuff like lower down payments that got the nation into the recession in the first place? But others were excited as this clearly opens the door for more homeownership, which could be the next step in economic recovery.
Regardless of where you fall on the spectrum, there are details and stipulations in the new approval system that you should be aware of to address your qualms.
The loans will be available exclusively to first time home buyers, buyers who have not owned a home in many years (for Fannie), or those with lower incomes than the town median (Freddie).
The loans are an option for those with credit scores as low as 620 (the standard minimum), so long as they had mitigating factors that lowered risk, such as a low debt to income ratio.
Fannie Mae has already begun rolling out their new programs. Freddie Mac, meanwhile, won’t make the new policies effective until March.
If you’re concerned that such low down payments could lead to messy foreclosures in the future, perhaps your prediction isn’t as certain as it may seem. Studies show that those with down payments of 3-5% are just as likely to default on their home as those with 8-10% down, which is already considered relatively normal. That means about .4% of buyers will default on their loan. This is no more or less financial risk than buyers already take.
Furthermore, since the move from both lenders specifically targets first time home buyers, this could be exactly the move the economy needs to be entirely back on track. We’ve discussed before how 2014 saw the lowest percentage of first time home buyers in almost two decades.
Both companies seem to think that these new, more accessible qualifications will be a very low percentage of their total business. They express confidence that this will serve it’s purpose of establishing more homeowners in a way that is only beneficial to the economy.
“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,” said Fannie Mae executive Andrew Bon Salle.
What do you think? Are you excited about more accessibility to become a homeowner, or do you worry about the long-term repercussions? Leave your two cents in the comments below!
Fannie Mae and Freddie Mac Accepting 3% Down Payments (Kind Of…) by HouseHunt