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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!

13 thoughts on “The 3% Down Payment Mortgage Has Returned”

  1. 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 !

  2. 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.

  3. Colin
    I need financing at 95 % for rental property under $100,000 property. I need 5 % down type of loan. I have
    excellent credit and rental property assets. Are there
    any that you know of that can work with me.

  4. Paul,

    That might be a tough one…probably best to contact a broker or two to see if there’s any lender out there to help you.

  5. Colin,
    I had a foreclosure 13 months due to pay reduction and eventually a job loss. As per the guidelines under FHA -Back to Work program – I qualify for this program as my income was reduced to 25% for more then 6 months and I have been on time with payments for last 24 months except the foreclosure last year. We also have more than 15% for the property we are looking for in SC. I want to know if there are any other programs like FHA offered by other banks that will allow me to get a mortgage loan within 12 months of foreclosure with NO PMI as FHA’s PMI is awfully high for the life time of the loan.

  6. Sandesh,

    Possibly portfolio programs (the bank’s own programs) or non-QM programs, but those will probably have much higher interest rates than FHA, which may be worse than the high PMI costs.

  7. “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.”

    This statement may have been true when this article was written in April 2014 but that’s not the case now. I was applying for the Right Step Loan and my fiance was gifting me the money and the loan processor just informed me that is not allowed.

  8. Hello Colin,

    Very informative article.

    I have a very good question- one I haven’t found an answer to yet anywhere…

    We’re pre-approved and looking for a rural home we could use VA with (or FHA/VA 203K type loans in the event it might need some work)….in Sonoma County, CA. Every website I look at says FHA/VA loan limits are 520,900 in this county. Yet, our lender says not to worry…”high balance” loans in this county maximum are 625,500. Can you please tell me what is what? What’s the real answer? Is there such a thing as “high balance” that goes above the maximum loan limit/amount in this county that is 625,500? Cannot find the definitive answer anywhere! Thanks!

  9. Celine,

    For Sonoma County I see a max loan limit of $520,950 for all loan types. Some other counties in California go up to $625,500. Why are they saying you can in Sonoma?

  10. Hi Colin

    I am trying to find a way to buy my parents home
    They are in their 70s and still owe about 170k. We want them to stay in the home and use it was either a second home or an investment property. The main intent is to ease their financial burden. I just spoke to a bank who said that the owners couldn’t be living in the property if we bought it from them?

    Any advice would be greatly appreciated. We own our home in nj and they are in Ohio.

    Best regards,


  11. Hi Colin

    Does quicken loans offer this 3%? I also hear/see mixed reviews regarding them. Any input?

    Thanks Shanita

  12. Shanita,

    Not sure, but I assume most lenders will offer it. Quicken receives top marks in the J.D. Power survey every year but a lot of individuals seem to think otherwise…

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