Fannie Mae and Freddie Mac have changed their tune. Instead of needing a 5% downpayment to get a loan, now you only need 3% to qualify. This is great news if you are a first-time home buyer, or are a cash-strapped younger family. It might get you into your own home.
The agency’s reason for lowering the standard was to get more young and first-time buyers into the market place. With homeownership rates at a 19-year low at 64.4%, it’s not surprising that the real estate market is struggling to get back to a really healthy place.
Still, there are safeguards built into the process that will keep poor credit risks from slipping through the cracks and getting a loan and then not being able to pay it back. Freddie Mac will require homeownership counseling for new buyers and most programs will not allow “cash out” refinancing.
The question is, how many lenders will actually take the leap and offer these loans with only 3% down payments. Bank of America has already said it will not lower it’s downpayment requirement amount for new homeowners. And other banks have been slow to adopt the new downpayment option.
How Freddie and Fannie Work
Understand that Freddie Mac and Fannie Mae don’t originate loans, they just guarantee them. Lenders sell loans that meet the agencies criteria to Freddie and Fannie and then they package the loans into securities and sell them to investors. If a loan goes bad the investor is covered by Fannie and Freddie, and they in turn can force the originating lender to take the loan back if it goes bad. You can learn more about Fannie and Freddie here.
Sounds complicated, and that’s why some industry experts aren’t sure the new requirements are such a good idea. It may be too soon to loosen requirements according to some. But the real estate market is still struggling, and anything that can help move it forward must be seen as helpful. It’s still up to the lenders to make good loans. They’ve been sitting on the sidelines covering their own “butts” for long enough.
And if it helps young families and millennials to get into the real estate market it could be good for everyone. The market will improve, home values will go up, and the real estate market just might get back to a place that is healthy for all.
Now if we can just get the foreclosure mess completely behind us. I guess only time will tell. Seems like we’ve said that before.