The 3% Down Payment Mortgage Has Returned

April 21, 2014 3 Comments »
The 3% Down Payment Mortgage Has Returned

Well that didn’t take long. Only about six months after we bid adieu to 3% down mortgages, they have resurfaced.

But this time things are a little different. Though Fannie Mae and Freddie Mac still don’t accept mortgages with less than five percent down, some individual lenders have loosened up guidelines in an effort to increase business.

It’s no secret that loan origination volume is well below levels seen last year, and perhaps the best way to boost sales is to make it easier to qualify for a mortgage.

One area that has been particularly troublesome for prospective buyers is coming up with a large enough down payment.  In fact, most renters have no other choice than a 3.5% down FHA loan.

Get a 3% Down Mortgage with No PMI

On Friday, TD Bank reportedly began offering mortgages with down payments as small as three percent to certain low- and moderate-income borrowers via its Right Step program, per the WSJ.

The program is reserved for borrowers who earn up to 80% of the median area income as determined by HUD, the parent of the FHA.

While not everyone can qualify for such financing, it does represent a loosening from the original five percent down payment required a year ago.

The loan program doesn’t require private mortgage insurance either, and the down payment can come in the form of a gift from family or a non-profit.

However, the interest rate on such loans will likely be higher to compensate for the increased risk and lack of PMI, though it could still be cheaper than FHA financing.

Because Fannie and Freddie haven’t changed their stance, TD Bank will likely keep the loans on their own books and assume the risk of default.

This represents a shift from the originate-to-distribute model that has been widely relied upon before and after the most recent mortgage crisis.

The WSJ noted that the Arlington Community Federal Credit Union in Virginia would also begin making 3% down mortgages starting next month, down from a previous minimum of five percent.

They will accept loan amounts up to $417,000, the conforming loan limit.

Another community bank based in New Jersey, Valley National Bank, lowered their down payment requirement to five percent from 25% for certain buyers on the East Coast.

Wells Fargo Also Offers Quasi-3% Down Mortgages Now

Even the nation’s top lender is in on the 3% down game, kind of. Though Wells Fargo requires a five percent minimum down payment for primary residential purchases, they now allow up to two percent of that to come in the form of a gift from relatives.

So in a sense it’s a 3% down mortgage as long as the borrower can secure that two percent from an allowable source.

While it sounds like loose lending has returned, Wells apparently has strict underwriting requirements for such loans, including high minimum credit scores and so on.

In other words, we haven’t jumped in the DeLorean, punched it to 88 mph and traveled back to 2006.

Sure, there are some lenders offering FHA loans with credit scores as low as 550, but most are still relatively cautious, especially with the ATR and QM rules in effect.

And I’ve yet to come across any lenders offering 100% financing on 4-unit, non-owner occupied properties with sub-620 credit scores. When that happens run, or rather, sell!

3 Comments

  1. Steve May 29, 2014 at 9:16 am -

    That didn’t take long! God bless the mortgage industry!

  2. Victoria July 10, 2014 at 1:04 am -

    Hi Colin, I really appreciate that you take the time to “translate” all the confusing guidelines, and to keep us updated about the industry, in such a concise manner !

    I was told that there was an FHA program that would allow Us to Buy a Property for our “Aging Parent” or “Recently Graduated Son/Daughter”. As a Primary Residence for them, with our Income to qualify… Only requiring the 3.5% Down.

    Is it true ? (I attempted to navigate the “HUD/FHA Website”, but got a Migraine within 30 minutes… without finding ANYTHING ! (I guess I’ve been “spoiled” by your Clear Descriptions/Explanations)

    Thanks !

  3. Colin Robertson July 10, 2014 at 2:46 pm -

    Victoria,

    You’re probably thinking of the “Kiddie Condo” loan program from the FHA, which is another name for allowing a non-occupant co-borrower. There’s also the Family Opportunity Mortgage, a conventional loan program that allows elderly parents or college students to get a mortgage with the help of a family member.

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