There's a new reason Realtors and lenders may expect more qualified borrowers at the closing table during this spring's homebuying season.
In addition to low mortgage rates and rising job growth, the down payment hurdle is starting to shrink for creditworthy borrowers, including first-time homebuyers and current homeowners who want to refinance. On March 23, Freddie Mac will start buying mortgages with down payments of only three percent – the first time down payments have been this low on Freddie Mac loans in nearly five years.
Why does a three-percent minimum down payment make sense today? Because the housing recovery is still sluggish and many otherwise qualified borrowers – particularly working families – are on the sidelines due to the challenges of accumulating funds for down payments. A three-percent down payment also makes sense today because tools like Freddie Mac’s Loan Quality Advisor provide lenders with a cost-effective means of evaluating a loan relative to Freddie Mac's eligibility requirements, ensuring a higher level of purchase certainty.
Consequently, our conservator, the Federal Housing Finance Agency's (FHFA) 2015 Scorecard for Freddie Mac made it a priority for us to "work to increase access to mortgage credit for creditworthy borrowers, consistent with the full extent of applicable credit requirements and risk-management practices."
This is what the Freddie Mac Home Possible AdvantageSM mortgage is designed to do. Home Possible Advantage is flexible enough for both first-time homebuyers and homeowners looking for a no-cash-out refinance, but includes responsible credit and underwriting standards to keep risks in check for borrowers, taxpayers, and Freddie Mac.
Our Home Possible Advantage program is focused on supporting first-time homebuyers and low- and moderate-income borrowers. For example, there is no minimum required borrower contribution – meaning parents or other relatives can cover 100 percent of the down payment through gifts. The same is true for all Freddie Mac Home Possible mortgages, whether the down payment is three percent, five percent, or something else. This makes Home Possible a powerful option for families who want to help their children settle into a home of their own.
In order to limit default risk, Home Possible Advantage is available as a fixed-rate mortgage for primary residences only; this ensures that principal and interest payments stay the same and borrowers won’t worry about future mortgage payment shock.
Home Possible Advantage also requires full documentation, and the right balance of credit and debt-to-income ratios to ensure a borrower can comfortably manage homeownership. First-time homebuyers must complete pre-purchase housing counseling, like Freddie Mac’s CreditSmart®, which our research shows can reduce delinquency risk by about 29 percent.
As noted above, there is no adjustable or variable-rate option for Home Possible Advantage. It can't be used to finance a vacation home. It's not for investors who want to buy or refinance rental properties with 2-4 units.
These requirements make it possible to provide working families with a sensible and low-down payment mortgage that supports our mission to foster a strong mortgage market in a taxpayer-friendly way. They should also put to rest the claims of the critics who are filling social media with dire predictions of a new mortgage crisis.
As FHFA Director Mel Watt said in recent testimony before the House Financial Services Committee, "These purchase guidelines will provide an important – but targeted – access to credit opportunity for creditworthy individuals and families."
We certainly agree. By launching our three-percent down payment mortgage now, at the start of the spring homebuying season, lenders will be ready to serve qualified working families who are ready to buy and keep the recovery going.
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