Fannie Mae and Freddie Mac are about to unleash 3 percent down-payment mortgages on the real estate market with hopes of making home ownership more accessible to those with good credit coupled with an inability to make a larger down payment.

In order to avoid another foreclosure festival, as seen in 2008, they plan on implementing tighter lending standards, and other loan conditions, to ensure homeowners are less likely to default.

About Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are the two largest mortgage backers and have been in existence for decades.

After the 2008 mortgage crisis, the U.S government took over control of the agencies and provided almost a combined $200 billion of taxpayer aid.

The Impetus

After the mortgage crisis, lending standards became more stringent which resulted in first-time buyers accounting for approximately 30 percent of home purchases, versus a 40 percent historic average.

Home and condo sales have been down recently, which is considered to be stalling a recovery from the 2008 economic downturn.

Some of the previously available loans requiring 20 percent down were not palatable by buyers. Especially in cities like Los Angeles where a buyer would have to put down two hundred thousand dollars to purchase a million dollar home.

The Programs

With pressure to make home ownership more accessible to the masses, the agencies eventually decided to loosen up their standards and have announced the “Home Possible Advantage” and “MyCommunityMortgage” programs which offer 30 year fixed-rate loans.

Freddie Mac will start offering their program on March 23, 2015. Fannie Mae’s program starts on December 13, 2014. 

Who is Eligible?

The programs are geared towards first-time buyers (for Fannie Mae, the borrower must not have owned a home during the past three years) in the “low” to “moderate” income ranges.

This translates to household incomes which are slightly below the area median. The limits on income are eased in areas where home prices are unusually high.

For example, in California, the borrowers income can be up to 140% of the local median. In New York, it is as much as 165% of the median.

The borrowers will be required to purchase private mortgage insurance, have at least a 620 credit score and clearly document their employment status, income and assets.

Home ownership counseling is also required.

The loans are also only available for owner-occupied home that are a primary residence. This shuts out investors and real estate flippers.

Mortgage refinancing is also available through the plans.

Advantages Over Other Loans

The Federal Housing Authority (FHA) does currently offer a 3.5% down loan.

However, the Freddie/Fannie backed loans are considered more advantageous by some since the borrower is not required to carry Private Mortgage Insurance (PMI) over the entire course of the loan.

Instead, they can cancel the insurance once the mortgage balance is less than 80% of the home’s value, due to payments or an increase in value.

Paying PMI (currently at 1.35%) over the entire life of a loan results in an additional $80 per month for every $100,000 borrowed. For a million dollar loan, that’s an additional $800 per month.

Interest rates are also lower for Fannie/Freddie loans. 

Another Housing Bubble?

Critics argue that introduction of these programs are a step backwards towards the last real estate market meltdown.

They hear “3% down” and hearken back to the catastrophic times of “stated income,” “interest only” and adjustable rate loans.

However, the guidelines dictated by the Freddie/Fannie loans were designed with the previous housing bubble in mind and they claim that included safeguards will help minimize foreclosures.

While these mortgages, alone, might not directly cause another housing bubble, they could backfire and possibly add air to the “mother of all asset bubbles” forecast by some experts.