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Home Loan Programs Let Buyers Put Less Down

Credit...Robert Neubecker

One of the biggest hurdles to buying a home is accumulating the pile of cash for a down payment. By some estimates, it could take two decades to come up with a respectable 10 percent.

With the introduction of several new programs, prospective home buyers with little money to put down now have more options to consider. But they will need to sort through the many rules and fine print to find the most cost-effective loan, and they may ultimately come to the realization that it actually pays to wait and save a bit more.

Both Fannie Mae and Freddie Mac recently introduced similar programs aimed at middle-income borrowers that permit down payments as low as 3 percent. And the Federal Housing Administration, which insures loans and generally requires down payments of at least 3.5 percent, recently lowered one of its fees, making the program a bit more competitive with the two new options.

Whether it is prudent to buy a home with so little down is the first question borrowers need to answer. Critics have already questioned whether borrowers’ having such small stakes in their homes will potentially result in another rush of defaults, which tend to be higher on mortgages with smaller down payments.

But it is important to know that the low-down-payment options now available are not synonymous with the subprime loans that proliferated during the housing bubble, which often required little more than a pulse to qualify. Without these new programs, advocates said swaths of the population will be locked out from the forced savings plan that is homeownership. After all, it would take 20 years for a household earning about $50,000 to save 10 percent, plus closing costs, for a $158,000 home, according to calculations by the Center for Responsible Lending.

“Right now, we have excessively tight lending standards and thousands of creditworthy borrowers are losing out on an opportunity to build wealth through homeownership at a time when we are experiencing historically low interest rates,” said Nikitra Bailey, an executive vice president at the center.

Borrowers who determine they are in a position to push ahead have a few avenues to consider. Fannie’s new offerings are two-pronged. Its first program permits all first-time home buyers — that is, at least one co-borrower must not have owned a home in three years — to put as little as 3 percent down. They must also pay mortgage insurance, a requirement on all traditional mortgages with down payments of less than 20 percent.

But these borrowers will pay significantly more for mortgage insurance compared to someone who waited to save enough to make a down payment of 5 percent or more, explained Erik Johansson, vice president for lending at Guaranteed Rate, a home loan lender based in Chicago. “The difference may make it worthwhile to wait and make the larger down payment,” he added. Poor credit scores will also obviously make borrowing more expensive.

Then there is Fannie’s new MyCommunityMortgage program, as well as Freddie’s HomePossible. These programs are a bit different in that they are available to people with lower and moderate incomes based on where they live; the limit is generally about $128,865 in the high-cost New York metropolitan area, for instance. Taking these loans may require borrowers to have some form of “prepurchase” counseling. (Fannie also requires a minimum credit score of 620, while Freddie, whose program becomes available in late March, said its minimum score is determined by its automated software and varies based on borrowers’ other characteristics; for manually underwritten loans, it’s 660.)

Those two options have several benefits: Borrowers are likely to receive better pricing on interest rates and pay less for mortgage insurance, and gifts and certain grants can be used toward the down payment. Fannie’s program requires that at least one co-borrower be considered a first-time home buyer, while Freddie’s program is open to all.

Then there is the F.H.A. option: It permits credit scores as low as 580 with a down payment of at least 3.5 percent, which is slightly higher than Fannie and Freddie require. “F.H.A. is more flexible on credit scores and debt loads,” relative to income, said Bill Banfield, a vice president at Quicken Loans.

With F.H.A. mortgages, borrowers will now pay an annual mortgage premium of 0.85 percent of the loan amount, down from 1.35 percent, on 30-year fixed mortgages with down payments of 5 percent or less. That fee is broken down into monthly payments. But borrowers must also pay an upfront mortgage premium of 1.75 percent of the loan amount, which is often rolled into the mortgage.

People with weak credit scores may still be better off going through the F.H.A. program, since it tends to be more forgiving (though lenders that sell mortgages can require higher scores), brokers and counselors said. One drawback, however, is that the F.H.A. does not allow borrowers to drop mortgage insurance once they have built up enough equity — 20 percent of the original home value — as Fannie and Freddie do.

Given the many highly personal moving pieces — credit scores, total income and how long the homeowner plans to live in the home, among other things — borrowers will need to run the numbers carefully. Lenders may tack on their own stricter criteria: higher credit scores, lower debt loads or some other hurdle.

But here is how the options might stack up for a person with a solid credit score of 720 and a down payment of 3.5 percent ($14,000) on a $400,000 home in New York. The Fannie MyCommunityMortgage loan is the most economical option: The total monthly mortgage payment, including mortgage insurance, is about $2,092, according to calculations made by Quicken Loans. But to use that option, a borrower or borrowers living in one of the higher-cost counties in New York — Kings, Queens, Nassau or Westchester, for example — must earn less than $128,865 or so.

A loan backed by the F.H.A. (which can wrap the upfront mortgage premium into the loan and has no income ceiling restrictions) would cost about 4.3 percent more, at nearly $2,182 monthly. The Fannie loan with no income restrictions would cost the most, at $2,281 monthly. (If a borrower has saved up for a 10 percent down payment, however, the payment drops to about $1,875.)

If the borrower had a subpar credit score of 620, the F.H.A. loan might be a slightly better deal. In that case, the monthly payments would still be $2,182, compared to $2,200 through MyCommunityMortgage.

Several large banks, including Bank of America, JPMorgan Chase and Wells Fargo, said they had not yet decided whether they would participate in the low-down-payment programs. And Guy Cecala, publisher of Inside Mortgage Finance, said he expected the larger players to remain reluctant to take the risks.

“The smaller nonbanks are much more excited about these programs both at Fannie, Freddie and the F.H.A. than the large banks who dominate the mortgage market,” Mr. Cecala said. “If you want a low-down-payment mortgage, you are likely to see more products and better pricing from the smaller nonbanks than you are larger banks.”

And in many cases, it may pay to hold off. Michelle Jones, a senior vice president at ClearPoint Credit Counseling Solutions, which counsels borrowers, said prospective home buyers should keep an adequate cash cushion, and refrain from plowing every last dollar into a down payment. (Some mortgages or lenders may require a certain amount held in reserve.)

“If you don’t have sufficient savings and the 3 percent down is really a stretch and you need to borrow from friends and family to make it happen,” she added, “that should be an indication that you aren’t ready to step into a mortgage.”

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A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Home Loan Programs Let Buyers Put Less Down. Order Reprints | Today’s Paper | Subscribe

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