Since the advent of the subprime mortgage crisis in late 2007, mortgage companies, banks and government-backed mortgage guarantors have tightened their lending standards. Many potential homebuyers and refinancers without the near-perfect credit and substantial 20 percent down payment (or equivalent equity) required, have had to kiss their dreams of home ownership or lower interest rates goodbye as a result. Fortunately, all of that is about to change.
Fannie Mae and Freddie Mac are lowering their down payment requirements.
These two government sponsored enterprises buy mortgages from the banks, credit unions and other financial institutions that make them. Doing so is a sizable investment, and to minimize their risk they require that the loans they purchase “conform” to specific guidelines. In an effort to make home purchases more affordable for first time and low-income homebuyers, they recently adjusted these rules to allow for the backing of mortgages with 3 percent down payments.
In order for the entities to consider the mortgages conforming, these loans must require private mortgage insurance, a minimum 620 credit score, and complete income, asset and job documentation. Additionally, borrowers receiving these loans must attend homeownership counseling.
Fannie Mae started backing loans that met the loosened requirements in December. Freddie Mac will begin purchasing them from lenders in March. They will include 15-, 20- and 30-year fixed rate options with a borrowing limit of $417,000.
Lenders are already responding favorably to the changes.
In a recent article by CNN Money, an official at Fannie Mae noted that the average credit score seen on approved loan applications has dropped slightly. He is seeing lenders making mortgage loans to borrowers with lower down payments as well. And according to a survey conducted by the Federal Reserve, 14 percent of senior loan officers report that their banks began loosening lending standards in the fall.
What does this mean for you? If you’ve been dreaming about buying your first home, moving up into a bigger home, or refinancing your current mortgage, it’s unlikely there will ever be a better time to do so—even if lenders have turned you down before. Contact your real estate and mortgage professionals today to explore your options and learn more about next steps.
