Lower down payment mortgages

In an effort to stimulate the economy, Fannie and Freddie have re-introduced the low down payment conventional mortgage.

Fannie and Freddie both had "Low to Mod Income" loans and the "97%" loans available before the mortgage meltdown.   Lending became tight as home prices dropped and borrowers defaulted.

After much debate between lenders and the federal government, the national Fannie and Freddie agencies have re-introduced the 3% down mortgage.

Fannie and Freddie usually are more cautious than FHA/HUD.   FHA requires 3.5% down (up from 3% before the crisis) with a very low credit score (usually 580, but very few lenders will go that low).  Fannie and Freddie are back to 620 credit score

Both require mortgage insurance and typically FHA is not as good.  It's usually more costly than a conventional mortgage insurance policy - and you can push off a conventional mortgage insurance policy once you've established enough equity (see your lender's rules regarding this).

So the question is how a lower down payment for conventional loans will impact housing.  Overall, it will open the door to those who otherwise would not qualify or did not have enough for their down payment.

But, it also increases the risks of lending - as the less a borrower puts down the less "skin in the game" they have.   We can't forget the "keys in the mailbox" route that many borrowers took just a few years ago when they owed significantly more than what their home was worth.  That's what happens when the down payments are not enough to make a person feel vested in the transaction.

The second question is what type of credit over lays will there be for the 620 borrower versus the 740 borrower, both with just 3% down?   Will it be a point or two points?  Will it be via rate?   If the rate is higher, how will that impact the DTI and will that then impact the lower income borrower from getting the 3% down loan?

We shall see how this plays out.  The banks have not forgotten the costs of mortgage lending, nor should they.   Prudence will most likely rule the day on the part of the banks.