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Feds hope to spur struggling housing market

By: James O'Connor // Money

by James O’Connor

Fannie and Freddie are banking on the three-percent housing down payment to revive the struggling housing market.

After announcing plans in October to boost lending for first-time and middle class borrowers by reducing down payment requirements, Fannie Mae and Freddie Mac have detailed the guidelines to banks that they hope will breath new life into the housing market.

The program could help cash-strapped borrowers afford homes by requiring less up-front cash. There will also be a non-cashout refinance option available, meaning homeowners can refinance the principal for a lower rate but can’t take borrow equity.

The loans will have lower interest rates than those offered by FHA, which also offers loans with three-percent down payments, but they typically have higher interest rates because credit scores for those loans are lower. FHA requires a credit score of 580 to qualify although some lenders accept a credit score of 620 or higher. The debt to income ratio to qualify should also be 31 percent or less, according to the FHA website.

At least one of the borrowers must be a first-time home buyer to get a Fannie Mae backed loan, and Freddie Mac will require that all borrowers must not have any ownership in any other home.

Private mortgage insurance (PMI) will still be required, but unlike FHA loans, the PMI will typically roll off after five years once 20 percent equity has been reached. FHA loans require PMI through the life of the loan and can only be rolled off with a refinance.

Fannie Mae’s new products will be available as of Dec. 13, which means banks can begin offering loans for repurchase by the agency this year. Freddie Mac will begin its program March 23.

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