One of the biggest obstacles for aspiring homeowners is coming up with a down payment. When you consider that the traditional wisdom is that you need 20% down in order to afford a down payment, the concern makes sense. Here’s the thing though. The conventional wisdom can sometimes lead you astray. The fact is that you can get a conventional loan with as little as 3% down.
If you’re looking to get into a conventional loan with 3% down, the time to apply is now. Fannie Mae and Freddie Mac are making some changes regarding their Home Possible®and HomeReady®loan options available to those looking for 3% down payments. This is a change affecting all mortgage lenders who offer the 3% down options from Fannie and Freddie. In order to give yourself the most possible options and the best chance of qualifying for a 3% down conventional loan, you should apply by July 20.
We’ll also discuss changes being made to the loan approval process for loans purchased by Fannie Mae.
What’s Changing with 3% Down Loan Options?
There’s a big change that’s being made near the end of this month that Quicken Loans®clients should be aware of.
Changes to Income Limits
After the date listed above, those looking to qualify for a couple of 3% down loan options will have to follow a new income limit.
Up until now, you’ve been able to apply for one of the loan options as long as you didn’t make more than the median income in your area through either Freddie Mac’s Home Possible®or Fannie Mae’s HomeReady®programs. Going forward, these mortgage investors want to focus on serving low- to moderate-income borrowers. As a result, they’ll be limiting borrower income to 80% of the area median.
Previously, there were also areas where income limits didn’t apply based on them being underserved. These will no longer exist after the dates above. Everyone is held to the limit of 80% of the area median income in order to qualify for certain 3% down programs.
With these programs, you can get a conventional loan with as little as 3% down if it’s a one-unit primary property. You may be able to get multiple units with a higher down payment. Vacation and rental properties aren’t allowed.
Are There Any More 3% Down Options on Conventional Loans?
If you don’t qualify based on the income limits above, there may be another option for you if you’re a first-time home buyer. For the purposes of this program, a first-time home buyer is anyone who hasn’t owned residential property in the 3-year period before the close of the loan. There are other limited circumstances in which you may be considered a first-time home buyer, but this general rule covers the majority of situations.
As long as one client on the loan is a first-time home buyer, this program could be another option as there are no income limits.
Changes to Fannie Mae Risk Calculations
In addition to the income limits on certain 3% down loan options, there will be changes to the way certain risk factors are weighed for loans bought by the mortgage investor Fannie Mae. Let’s break down what you need to know. It’s important to be aware that all these things will work in tandem, so no single factor will be disqualifying on its own.
These changes also don’t apply to one’s purchased by the other major conventional loan investor, Freddie Mac. By working through Rocket Mortgage®by Quicken Loans or speaking with one of our Home Loan Experts, we can help find the right loan program for you.
Less Approvals with Low Down Payment
Although having a 3% down payment is certainly a great option for many of our clients, low down payments are considered to be a bigger risk factor. If you find yourself on the edge of qualification, someone who puts 10% down is more likely to be approved than someone who puts 3% down, for example.
Pay Attention to Debt-to-Income Ratio (DTI)
DTI is a key component in the majority of lending decisions. The ratio takes a look at your monthly payments on revolving and installment debts and compares them against your monthly income. The ratio is as follows:
As an example, let’s say you make $60,000 per year. You have a $400 monthly car payment, $350 in student loan payments, $600 per month on a personal loan, and a $1,050 mortgage payment. Your monthly DTI would be 48% ($2,400/$5,000).
If you had this DTI, you would be considered a bigger risk than someone who was closer to maybe43% by comparison.
Good Credit Is Key
If you’re at the boundaries of qualification, a final factor that may play an even bigger role (than it already does in the mortgage process) is your credit score. Those with a median FICO®Score of 680 may have a better chance at qualifying than someone who has other high-risk factors and a median score of 620, for example.
It’s worth noting that no matter who your mortgage investor is, the size of your down payment and your credit score are two huge factors in determining the kind of interest rate you can get.
There’s some good news here. If you think you’re ready, you can find a house by July 20 and be considered under the current qualification standards which could make it easier to qualify for a 3% down payment and other programs. Even if you’re not quite ready yet you can still apply online, or give us a call at (800) 785-4788 so that we may help to find the best option for you.
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