Government regulators reduced the required down payment for certain types of mortgages, which should make it easier for first-time buyers to purchase a home. The new regulations, announced by FannieMae, allow eligible first-time home buyers to purchase a home with a down payment of as little as 3% of the purchase price of the property, down from the previously required minimum down payment of 5%. The new down payment regulation applies to first-time home buyers (or buyers who have not owned a home within the past three years). Additionally, in order to qualify for the program, buyers must demonstrate the ability to repay the mortgage according to industry-standard Qualified Mortgage guidelines (basically you prove you can back back the mortgage based on your income and debt levels), meet minimum credit score requirements; and, depending on the specific mortgage program being used, buyers may have to complete a pre-purchase home buyer education course. It is important to highlight that home buyers who make a down payment of less than 20% are typically required to pay private mortgage insurance (PMI) which is an ongoing monthly fee in addition to your mortgage payment. The reduced down payment requirement only applies to fixed rate mortgages up to 30 years in length so a borrower would not be able to use an adjustable rate mortgage or an interest only mortgage. Previously, if a home buyer wanted to purchase a property with a down payment of less than 5%, they would have typically used the FHA Home Loan Program. The FHA Program allows buyers to purchase a home with a down payment as little as 3.5% but requires the buyer to pay an up-front and ongoing FHA Mortgage Insurance Premium (MIP) which is typically more expensive than PMI. Additionally, eligible military personnel and veterans can use the VA Home Loan Program that requires no down payment although the borrower is required to pay a one-time, up-front VA Funding Fee.
What it Means for Mortgage Borrowers
Although the reduced down payment requirement is only a small change, it should make it easier for more first-time home buyers to purchase a home. Home purchases by first-time buyers are at their lowest level in almost three decades and the new regulations are designed to make home ownership more attainable for more people. If you are thinking about purchasing a home for the first time, check out our First-Time Home Buyer Mortgage Cheat Sheet with useful information and helpful resources. Additionally, to learn more about the new down payment programs and how they could work for you, contact your local lender by using the INTEREST RATES feature on FREEandCLEAR.
The FREEandCLEAR Mortgage Expert