New lending guidelines from the Federal Housing Finance Agency will cut the down payment minimum from five percent to three percent for conforming loans that are purchased by Fannie Mae and Freddie Mac on the secondary market. This means more first-time and lower income borrowers will be able to get a conforming loan, a 30-year fixed rate mortgage, as long as they have good credit.
According to FHFA Director Melvin Watt, these new underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices.
"To mitigate risk, Fannie Mae and Freddie Mac will use their automated underwriting systems, which include compensating factors to evaluate a borrower's creditworthiness," explained Watt in a statement to the press. "In addition, the new offerings will also include homeownership counseling, which improves borrower performance."
FHFA will monitor the ongoing performance of the three-percent-downpayment loans. Private mortgage insurance is still required on any mortgage issued with less than 20 percent down.
In October, the FHFA announced that it has reached an agreement with major banks to expand lending to homebuyers. While it's unknown how many borrowers will benefit from the lower down payment amount, most first-time and lower-income borrowers would have a tough time coming up with the $41,600 cash needed to buy the median-priced American home at $208,300.
At 4.14 percent interest, Bankrate's national average this week, three percent down, and assuming the borrower is not rolling any other costs into the loan, a borrower would have to put $6,249 down to finance $202,051. The monthly payment would be $981, and interest payments would be $151,109.46 over the 30-year term.
With five percent down, the borrower would take out the same loan, but would only need to put down $10,415 to borrow $197,885. The monthly payment would be $960.77 and 30 years of interest payments would be $147,993.80.
For the borrower, the difference between $10,415 and $6,249 is $4,166. The difference between 30 years of interest payments, $151,109.46 minus 147,993.80 is $3,115.66.
Lowering the down payment for a conventional loan to 3 percent would take first-time buyers about 12 to 18 months to save enough to put down on buying the median priced home.