3% Down Payment
There’s something about the holiday season that encourages people to make major life announcements. It may be the champagne punch talking, but we like to think it’s the warm and fuzzy feeling you get when you’re surrounded by loved ones. The words seem to tumble right out. An engagement! A baby! A new house!
While the holidays are a prime opportunity to share big news with your family and friends, you should be prepared to get an earful of advice from those who have “been there, done that.” For example, as soon as you announce your plans to buy your first home, everyone will have an opinion about how you should finance it.
Unless you have a juicy enough bank account to pay for your new abode in cash, you’ll have to take out a mortgage. You may be apprehensive about borrowing such a huge chunk of change, but don’t sweat it. 70 percent of Americans are in the same boat. And despite what uncle Chuck tells you between bites of Christmas ham, you don’t need to put 20 percent down.
Yes it’s true that a bigger down payment means smaller monthly mortgage payments, but not everyone can swing it. Many folks are still picking up the pieces from the recession, while others are struggling to chip away at crippling student loan debt. Luckily, even if you fall into one (or both) of these camps, you can still achieve your dream of homeownership.
Mortgage giants Fannie Mae and Freddie Mac have announced they will soon allow for mortgages with a down payment as low as three percent instead of the five percent currently required. That is, as long as one of the borrower hasn’t owned a home within the past three years. The change has already gone into effect at Fannie Mae and will go into effect March 23, 2015 at Freddie Mac.
With that said, those whose credit scores suffered as a result of the financial crisis aren’t totally in the clear. Freddie, Fannie, and their regulator say that “only creditworthy borrowers who take out plain-vanilla, fixed rate mortgages will qualify for the new programs, and all of them will be carefully vetted to make sure they can pay back the loans.” The industry doesn’t want to take any risks with borrowers who have less-than-stellar credit.
If you’re planning to take advantage of the three percent down payment program offered by Fannie Mae or Freddie Mac, here are some key differences between the two:
- Only open to those who haven’t owned a home within the past three years.
- Has a limited cash-out component to cover closing costs.
- Requires counseling for low- to moderate-income consumers.
- Allows monetary gifts to be considered as financial reserves.
- Open to those who haven’t owned a home within the past three years as well as to repeat low- and moderate-income buyers.
- Requires homeownership counseling for all first-time buyers.
- Provides for no-cash-out mortgage refinancing.