Currently, Fannie Mae allows for as little as a three percent down payment for a conventional loan when purchasing a single family residence. This program has significant pricing advantages in comparison over a standard FHA loan. The three percent down payment can come from the borrower or be a gift. Gift funds can come from a family member or significant other, which can reduce the borrower’s out of pocket expenses to near zero at closing, depending on closing costs and prepaid items.
Changes took effect in late 2014 that greatly expanded the number of home buyers who can utilize this program. To determine if an applicant qualifies for this program, at least one of the home buyers must be a first time home buyer. The mortgage industry defines a first time home buyer as a person who hasn’t had ownership in a single family residence in the last three years. It is also a requirement that, at the time of closing, no other properties will be owned by any of the borrowers on the loan. If these qualifications are met, the next step is to determine which of the two available versions of the program will be utilized. The two versions are the My Community Mortgage, or MCM, version and the Standard version.
My Community Mortgage
To meet the requirements of the MCM version, the borrower’s income must not exceed the HUD median income. The loan officer will be able to determine if these income requirements are met. Most home buyers know they’ll need to prove a certain amount of income, but for this version it is possible to have too much income. The income that is used to qualify is only for the borrowers on the loan and not for the entire household, as would be common for other currently available programs. If an applicant meets these income guidelines, they will enjoy a slightly better interest rate, reduced mortgage insurance costs and other favorable underwriting guidelines.
If a borrower doesn’t meet the income guidelines for the MCM version, there is a three percent down payment program still available, the Standard version. This version carries slightly higher interest rates and slightly higher mortgage insurance rates than the MCM version. A borrower may also be required to have reserves, or funds set aside to cover a set amount of mortgage payments. The reserves must cover the full amount of the mortgage payment plus any escrows such as real estate taxes, home owner’s insurance and mortgage insurance.
Regardless of which version is used, the borrower will be required to pay mortgage insurance on the loan. There are two options when it comes to mortgage insurance. The first option is traditional stand-alone mortgage insurance, which is paid monthly and is included in the mortgage payment. The second option is lender paid mortgage insurance, more commonly known as LPMI. With LPMI, there is not a monthly charge for mortgage insurance; however, the borrower will be required to pay a slightly higher interest rate in order to compensate for the removal of the monthly mortgage insurance premium.
When looking at low down payment options to purchase your home, either of these programs could be a great fit. Both versions will require a Fannie Mae online approval which is completed by the loan officer at the time of loan application. First time home buyer counseling is also required by Fannie Mae. Information on counseling programs will be provided during the loan approval process. Escrows for both real estate taxes and home owner’s insurance are required and provided free of charge. No matter which version of this program you qualify for, the three percent down payment program is a great way to help you realize your dream of home ownership. For more information, please contact Kelly Tribell at Simply Home Lending, Inc.