Here’s an understatement: Buying a home is a big deal. A big, expensive deal…
Yes, unlike renting, buying property is an investment. But this investment doesn’t come cheap, especially when you consider the 20 percent down payment on a conventional mortgage. That’s $40,000 on a $200,000 home, $60,000 on a $300,000 home and so on. Coming up with this type of cash can pose a big challenge for first-time homebuyers. It can even be challenging for second and third time homebuyers looking to upgrade to their “forever homes” depending on the sale of their existing properties and the status of their savings account.
Now, it’s worth noting that FHA loans are available for qualified consumers, where they only need to come up with a 3.5 percent down payment. But new loan programs from Fannie Mae and Freddie Mac – HomeReady and Home Possible, respectively – are now able to offer low down payment options on mortgages. We take a closer look at each of them in this post:
This offering from FannieMae is a 97 percent loan-to-value mortgage, meaning that as little as a 3 percent down payment is necessary. It’s an ideal lending option for consumers with low to moderate levels of income, but who have a credit score of at least 620. For reference, FHA loans are available to consumers with a credit score as low as 580, so HomeReady is a bit more stringent in that department.
The HomeReady loan is offered for both first-time and repeat buyers. It also has a few unique stipulations. For instance, parents can be listed as co-borrowers, even if one of them isn’t actually residing in the home. It also qualifies for consumers with as high as a 50 percent debt-to-income (DTI) ratio, which is considerable wiggle room. However, consumers with both a 50 percent DTI and a 620 credit score would likely not be approved for such a loan – FannieMae generally only wants to see one or the other at the negative end of its standards.
Now that we’ve talked about the 97 percent loan-to-value mortgage from FannieMae, it’s time to focus on the same type of offering from FreddieMac. Known as “Home Possible,” its mortgage loan is also intended for lower income homebuyers, whether they are first-time buyers or repeat buyers. And like HomeReady, the Home Possible loan is a low down payment solution, where consumers can secure a loan with as little as 3 to 5 percent down.
One unique thing about the Home Possible loan is that it’s flexible when it comes to credit scores. In fact, you don’t even need to have a credit score to qualify for this home mortgage loan. What’s more is that the down payment doesn’t just have to come from personal income. Terms of the loan allow it come from other sources, such as employer assistance programs, family members or secondary financing.
Another low down payment offering from Freddie Mac is the HomeOne mortgage, which is available to first-time homebuyers. With HomeOne, minimum down payment is 3 percent, there are no geographic or income limitations, and the loan is applicable for a range of various property types. However, one unique thing about this is that in order to qualify, first-time homebuyers must meet certain educational requirements that reinforce the importance and responsibility of owning a home. This is a good thing for both lenders and consumers.
The bottom line is that home prices are rising as the housing market continues to power ahead. It’s a seller’s market, and it’s the buyers who are ultimately at the mercy of these higher prices. While it may not be as much of an issue for existing homeowners – after all, things will likely even out with the higher sale of their current house regarding the higher price point of their next house – it can be a challenge for first-time homebuyers. While the FHA loan remains an option, FannieMae and FreddieMac have come to the table with more affordable down payment options themselves. It’s all a win when a 20 percent down payment just isn’t doable.