97% Mortgage Loans Coming in 2015: Two New Programs

Home buyers with limited down-payment funds could have an easier time finding 97% mortgage financing in 2015. Two new programs announced recently would fund up to 97% of the purchase price, allowing borrowers to make a down payment of only 3%.

Fannie Mae and Freddie Mac, the two mortgage-backing giants that operate in the secondary market, recently announced they would start accepting mortgage products with loan-to-value (LTV) ratios up to 97%. This means qualified borrowers could buy a home with as little as 3% down at the time of purchase.

Dates: Fannie Mae’s program will commence in December and extend through 2015. Freddie Mac’s program, which is known as “Home Possible Advantage,” will be available for home loans with settlement dates on or after March 23, 2015.

The Return of 97% Mortgage Financing

During the “anything-goes” days of the U.S. housing boom, 97% mortgage loans were widely available to home buyers. In fact, many lenders were offering 100% financing in order to attract more borrowers and boost their loan volumes.

But then came the mortgage foreclosure crisis, followed by a full-scale housing market crash. In the wake of that mess, lenders began to require larger down payments and higher credit scores to reduce risk. The 97% financing programs became increasingly rare. Suddenly, lenders wanted home buyers to have more skin in the game.

Over the last couple of years, however, we have seen more lenders offering 3% down payments (for an LTV ratio of 97%). The first signs of easing came in the fall of 2013 when MGIC Investment Corp., one of the largest mortgage insurance companies in the U.S., said it would start backing loans with LTV ratios up to 97%.

Fannie and Freddie Are Now on Board

Now we have Fannie Mae and Freddie Mac, the two corporations that form the backbone of the secondary mortgage market, announcing they will accept 97% mortgage loans in 2015. This is a significant change that could affect many thousands of home buyers going forward.

If these trends seem eerily familiar to you, it’s with good reason. This is the kind of gradual relaxing of credit standards that took place during the boom years. Let’s hope it ends better this time around.

According to Bon Salle, an executive vice president at Fannie Mae: “Our new 97 percent LTV offering is simply one way we are working to remove barriers for creditworthy borrowers to get a mortgage.”

Creditworthy is the key part of that quote. A higher LTV brings more risk for lenders. So you can bet they will be scrutinizing borrowers’ credit profiles to see how they have borrowed and repaid money in the past. Borrowers with sub-par credit probably won’t qualify for a 97% home loan in 2015 — they might not qualify for financing at all.

With the higher LTV product, Fannie Mae requires at least one of the people named on the mortgage application to be a first-time home buyer. They define a “first-time” purchaser as someone who has not owned a home within the last three years.

Freddie Mac’s 97% financing product is open to repeat buyers, as long as the borrower does not have “any individual or joint ownership interest in any other residential properties” at the time of purchase.

For both programs, the loan must have a fixed rate of interest. Adjustable-rate mortgages (ARMs) are not permitted by the new 97% financing programs. The term can be up to 30 years in length, but no longer.

Lenders offering the Fannie and Freddie products must perform full income documentation to reduce risk. This means requesting any and all documents necessary to verify the borrower’s income situation — tax returns, pay stubs, bank statements, etc.

FHA: Another Low-Down-Payment Option

Home buyers with limited down-payment funds should also consider the Federal Housing Administration (FHA) loan program. Under this program, borrowers can buy a house with as little as 3.5% down.

However, as with the 97% home loan options above, borrowers who go the FHA route will have to pay extra for mortgage insurance. Any time the LTV ratio rises above 80%, some form of mortgage insurance will be required. This is true for both government-backed and conventional loans.

Where to learn more about the new programs:

Freddie Mac’s program

Fannie Mae’s program