Freddie Mac and Fannie Mae announced in December that they will start buying conventional mortgages with down payments as low as 3 percent of the home’s price, allowing more borrowers to get mortgages.

To understand how this affects the mortgage market, you need to know what the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) do. Both entities are government-sponsored enterprises (GSEs), which are backed by the government but aren’t part of the government. They don’t offer loans directly to the public but buy mortgages from banks and other lenders. That means those lenders then have more money to loan to other borrowers.

Both Fannie Mae and Freddie Mac buy only loans that “conform” to the guidelines they set, which typically involve minimum, down-payment amounts, debt-to-income ratios, credit scores and other requirements. By lowering the down-payment requirements, the GSEs are making home loans available to credit-worthy borrowers who may not be able to come up with large down payments.

More access to home loans

The GSEs want to give more people access to home ownership, particularly first-time home buyers. Both programs are for fixed-rate loans for first-time homebuyers and people looking to refinance their existing mortgages. Both programs will require borrowers to attend home-ownership education courses.

Fannie Mae’s program, which began in December, is available to qualified borrowers who haven’t owned a home in the last three years, and can only be used to by a single-unit primary residence. Homeowners can refinance up to 97 percent of the value of their homes, and can use up to $2,000 of their home’s equity to pay closing costs. Freddie Mac’s program won’t be available until March 23. Freddie Mac will offer a refinance option, but homeowners won’t be able to use equity to cover closing costs.

These loans will differ from Federal Housing Authority (FHA) loans, which typically require a 3.5 percent down payment. FHA loans must carry private-mortgage insurance (PMI), which lasts for the life of the loan. The new 3 percent down loans will allow borrowers to cancel their PMI once the balance of the mortgage drops below 80 percent of the home’s value, either because they’ve made enough payments or the home’s value has gone up. That could save borrowers thousands of dollars in PMI payments.

Let us help

If you want to purchase a new home or want to refinance your existing mortgage, a 3 percent down mortgage may be right for you. Embrace Home Loans can work with you to qualify and determine what type of loan will work best for your financial situation. Contact us today at 800-333-3004, extension 3560 or visit our website at http://www.embracehomeloans.com/stephen-thaggard for more information about loan options available for you.