Freddie Mac recently launched a new affordable mortgage option that allows a down payment as low as 3 percent. The Home Possible Advantage(sm) mortgage is ideal for low and moderate-income borrowers with limited savings, including first-time homebuyers.
The loan can then be sold to the secondary market as a conforming loan, offering borrowers with good credit and the ability to pay closing costs the ability to chase the American Dream without saving for years and years to pay 20 percent down.
Closing costs vary widely depending on where you live, but they average $2,539 for a $200,000 home. With the Home Possible Advantage, borrowers can use gifts from parents, grants, savings and other sources to provide the 3 percent down payment.
Required credit scores depend on the type of loan product you want and whether or not you're buying a single unit or up to four units in the same building, but you can count on at least a minimum of 660 to 680 for single occupancy.
You can also count on paying private mortgage insurance for any loan with less than 20 percent down. PMI is an insurance policy that protects the lender should you default, and the cost is based on your loan-to-value ratio and credit scores. Expect to pay $40 to $80 per month for every $100,000 you borrow. Once you've built equity of at least 20 percent in your home, you can contact the lender to review your loan against how much you've paid down and get your PMI canceled.
Home Possible Advantage mortgages can be used for a "no cash out" refinance of an existing mortgage. That means you take no money for the proceeds for remodeling or repairs. Available products are in 15-, 20-, and 30-year fixed-rate terms.
Some borrowers may be nervous about getting into a low-down-payment loan, but Freddie Mac assures lenders and consumers that the product is designed with the appropriate credit underwriting requirements for today's market.
The Home Possible Advantage has tougher credit standards than low down payment mortgages of the past, including lower debt-to-income ratios, no variable rate terms and it requires full documentation of employment and rental histories, plus it's only for owner-occupants who complete housing counseling online from approved vendors.
There are other programs available from Freddie Mac that allow you to purchase up to a four-unit property with landlord education required online.