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. Just in time for the 2014 spring home buying season.

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.

I took a look at TD Bank’s mortgage rates on their website and they seemed to be in line with typical market rates – not significantly higher or lower than the competition.

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!