Freddie Mac to strengthen affordable housing program, investing more in low down payment mortgages

Mortgage giant Freddie Mac plans to offer at least $3 billion in single-family affordable housing bonds in an effort to "support affordable homeownership and serve historically underserved markets," according to a press release. 

The initiative began in early October with $285 million in mortgage-backed securities for loans purchased through the Home Possible mortgage program, the company said. These mortgages allow low-income borrowers to buy a home for as little as 3% down.

In addition to addressing issues of housing inequality by offering affordable housing options, the program "is also intended to give investors a vehicle to invest in underserved communities," according to Freddie Mac CEO Michael DeVito.

Affording a mortgage down payment is the leading barrier to homeownership for potential homebuyers, according to Freddie Mac. But taking out a mortgage with low or no down payment comes with its downsides. 

Keep reading to learn more about low down payment mortgages such as those offered through Home Possible. And if you're in the market for a new home, compare mortgage rates for free on Credible's online marketplace, all without impacting your credit score.

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Mortgages that offer low or no down payment

Scraping together tens of thousands of dollars to pay for a 20% down payment can be a challenge for many first-time homebuyers and even current homeowners. In order to make homeownership more achievable for the average American, there are plenty of options for low down payment loans offered through the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and even conventional mortgage lenders. 

Here are some of the most popular mortgages with flexible down payment options:

• Freddie Mac Home Possible: 3% minimum down payment, no minimum credit score
• Fannie Mae HomeReady: 3% minimum down payment, 620 minimum credit score
• FHA loans: 3.5% minimum down payment, 580 minimum credit score
• USDA loans: 0% minimum down payment, no minimum credit score
• VA loans: 0% down payment, minimum credit score varies by lender
• Conventional loans: 3% down payment, minimum credit score varies by lender

In addition to credit score requirements, some of these mortgages have other eligibility requirements that borrowers must meet. USDA loans, for example, are only offered to borrowers who are buying in select rural areas, while VA loans require military service. And in order to meet the low down payment requirement on an FHA loan or conventional mortgage, it may be required that this is the first mortgage loan you've borrowed.

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What to know about borrowing a mortgage with a low down payment

Just because it's possible to qualify for a mortgage with little money down doesn't mean it's always a good move. Mortgage lenders like to see that a prospective borrower is financially committed to homeownership by saving up years in advance. Coming to the table with your own cash can make you seem like a less risky borrower.

Here are a few things to keep in mind before taking out a mortgage loan with low or no down payment amount:

• Your estimated mortgage interest rates may be higher
• Most lenders will require private mortgage insurance
• With less money down, your loan balance will be larger

Consider the drawbacks of putting little or no money down in the sections below.

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Your estimated mortgage interest rates may be higher

Putting 20% down on a mortgage can help you lock in a lower mortgage rate because lenders will see you as more financially stable and therefore, less risky. In contrast, coming to the table with a down payment that's smaller than 20% can pit you as a risky borrower, resulting in higher mortgage rates.

The higher your mortgage rate, the more interest you'll pay in interest charges over the life of the loan. Higher interest rates can also result in more expensive monthly mortgage payments. That's why it's important to compare your mortgage options before committing to a certain type of home loan or lender.

You can compare mortgage rates across multiple lenders on Credible, so you can know you're getting the lowest possible interest rate for your financial situation. Browse estimated mortgage rates from real lenders in the table below.

YOUR OPTIONS FOR MORTGAGE DOWN PAYMENT ASSISTANCE PROGRAMS

Most lenders will require private mortgage insurance

Private mortgage insurance (PMI) is a way for mortgage lenders to protect their investment in your home. Almost all types of mortgages — even programs put in place to assist low-income homebuyers — require PMI for a down payment of less than 20%.

PMI can cost hundreds of dollars per month, depending on your loan-to-value ratio (LTV). So the more money you owe on your mortgage, the higher your PMI costs will be.

There are some exceptions to this rule, though. Both USDA and VA loans offer zero-down mortgages without PMI, but they have stricter eligibility requirements than FHA or conventional loans. 

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With less money down, your loan balance will be larger

A larger loan amount may result in a higher mortgage rate, and it will also cost you more money over time. The rule is simple: the less money you borrow, the less interest you pay over the life of the loan. This applies to all types of loans, but it can be particularly costly since mortgages are spread over periods of up to 30 years.

You can see an example of how your loan amount will impact your monthly payment and the interest you pay over the life of the loan by using Credible's mortgage calculator.

Deciding which type of home loan to borrow can be a daunting task, but you don't have to go through the process alone. To learn more about the different types of mortgages and decide which option is best for you, get in touch with an experienced loan officer at Credible. 

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