(TNS)—First-time homebuyers now have more options when it comes to getting a mortgage with a low down payment. The only question is how many of those buyers—who tend to be young, often in their early 30s—will actually benefit from the loans.
First, a primer: This month, Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy, repackage and sell mortgages to investors, announced they will begin accepting home loans with down payments as low as 3 percent.
Most recently, the lowest down payment that buyers could make was 3.5 percent for mortgages offered through the Federal Housing Administration, a separate government entity.
Low down payment loans may sound risky. After all, during the housing crisis millions of people found themselves holding mortgages greater than their homes were worth, especially if they had put little down to buy the home.
Even so, a low down payment does not necessarily mean borrowers are more likely to default on the loan. More often, a change in personal circumstances—say, you get divorced or lose a job—drives defaults, says Paul Leonard, a senior vice president for federal policy at the Center for Responsible Lending.
What’s more important “is a careful examination of whether borrowers will have a reasonable ability to repay the loan,” he says.
Banks have been carefully screening buyers since the housing crisis, and tighter lending standards are one reason why many would-be first-time homebuyers are staying out of the market.
An annual survey by the National Association of REALTORS® found that first-time buyers accounted for only 33 percent of home purchases from July 2013 through June 2014, the lowest amount since 1987. Other reasons for the absence of first-time buyers include a tough job market, heavy student loan debt and tight supplies of entry-level homes.
All of which means to say that although some mortgages will require a lower down payment, first-time buyers still face several other hurdles to owning a home.
“The loans may expand opportunities at the margin, but I don’t think they will have a massive impact on the marketplace,” says Keith Gumbinger, vice president of HSH.com, which keeps tabs on home lending trends.
If you’re shopping for your first home, real estate pros suggest first reviewing whether you will qualify for a loan.
Fannie Mae starting this month will begin accepting 3 percent down-payment loans that require a minimum FICO credit score of 620. To be considered a first-time buyer, you must not have owned a home for at least three years.
Freddie Mac requires a minimum FICO score of 660 and will not begin to offer the low down-payment loans until March. You do not necessarily have to be a first-time borrower to qualify, but first-time borrowers will have to complete homeownership education.
If your score is below 620, you may qualify for an FHA loan, which requires a down payment of 3.5 percent.
In addition to considering other loan requirements, you also want to think about fees. Borrowers who put down less than 20 percent of a home’s purchase price are normally subject to mortgage insurance, and Fannie and Freddie loans are no exception.
Here, though, the fees may be lower than what FHA loans charge, Gumbinger says. That’s because FHA loans carry an upfront fee of 1.75 percent of the loan value, plus as much as 1.35 percent in annual insurance premiums for the life of the mortgage (on loan amounts of $625,000 or less and with a down payment of 5 percent or lower).
With Fannie and Freddie, there’s no upfront fee and the mortgage insurance typically can be canceled after the borrower has a loan-to-value ratio of 80 percent or less—but you’ll likely pay a higher interest rate since the average 30-year, fixed-rate conventional loan charges 4 percent today, compared with 3.75 percent for FHA loans.
What’s best for you? You’ll have to shop around.
“First-time buyers should meet with a knowledgeable local Realtor® and mortgage broker who can help them determine what their best options are,” says Bill Lublin, chief executive of Philadelphia-based brokerage.
Carolyn Bigda writes Getting Started for the Chicago Tribune.
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