Low down on new low down conventional loans

Starting this week, mortgage giant Fannie Mae announced home buyers can purchase a home under its standard 97% loan to value offering or its My Community Mortgage, both with a 3% down payment, requiring at least one co-borrower to be a first-time buyer.

This is for primary residence, single family and condo type housing, not for second homes, manufactured homes, investment properties or units.

Freddie Mac is about to end a four-year timeout from its previously popular mortgage that facilitated home financing with as little as 3% down. Taking it off the menu in March 2011, Freddie plans to bring back a version (limited to low- and moderate-income borrowers) called Home Possible Advantage in March 2015.

And, there is always FHA financing that is not restricted to first-time buyers, requiring 3.5% down.

What’s the minimum money it will take to get you in? And what’s the most affordable mortgage insurance payment you can find now that conventional financing is available with 3% down?

For any purchase, in addition to your down payment, you need to come up with closing costs and possibly escrow impounds for taxes and insurance and prepaid interest. Lenders and mortgage brokers may be able to offset the costs by offering no-point or no-cost loans. The trade-off is you are accepting a higher interest rate.

Shopping does matter. A 2012 Fannie Mae survey indicated that if you shop multiple mortgage brokers you can save $1,000 or more in closing costs.

Obvious ways to come up with the down payment are your own savings or gift funds.

In respect to Fannie Mae’s program, acceptable donors are your fiancée, domestic partner, spouse, child or other dependent, or any individual related to you by blood, marriage, adaption or legal guardianship, according to Andrew Wilson, senior director of Media and External Relations at Fannie Mae.

Less obvious ways to come up with the down is from your retirement savings. “You can withdraw, you cannot borrow against your IRA. You can do this without penalty for first-time buyers, subject to normal taxes,” said Stuart Friedman, financial consultant at Irvine, Calif., based Burnham Gibson Financial Group.

“Loans are available from your 401(k) if your particular plan allows it. Max loan is 50% of the balance. The plan sets the interest rate. You can amortize and pay yourself back in five years or less and you must pay it back if you leave your employer,” Friedman added.

FHA mortgage insurance is expensive but until this week it was the only financial instrument on the mortgage menu with less than 5% down. Standard FHA financing subjects you to a 1.75% upfront mortgage insurance premium (MIP) added to your base loan amount in addition to a 1.35% monthly mortgage insurance premium. As an example, your sales price is $100,000. You put 3.5% down which makes your base loan amount $96,500. Adding 1.75 (MIP) puts your loan amount at $98,189. If your fixed rate mortgage is 3.50%, it is effectively 4.85 once you add the monthly mortgage insurance of 1.35%.

For the standard Fannie Mae 97 loan, conventional mortgage insurance is either a one-time upfront charge that is not allowed to be financed or a monthly mortgage insurance premium, but not both. Unlike FHA, conventional mortgage insurance does not have a standard, across-the-board charge.

Have your loan officer compare FHA and conventional financing in respect to the total cost to get you into the property, the down payment, the settlement charges and the monthly payments including mortgage insurance payments. Do not assume that one program will be less expensive than the other.