Will 3% down payments boost millennial homeownership?

WEST PALM BEACH, Fla. – Dec. 10, 2014 – Millennials and Americans who survived the Great Recession by siphoning from savings accounts are the targets of a new program that allows first-time homebuyers to get a loan with as little as 3 percent down.

The Federal Housing Finance Agency announced the mortgage guideline change Monday, hoping the rock-bottom downpayments will boost homeownership rates, which dropped during the housing bust.

Federal officials called the new mortgage product a "significant milestone" in a call with reporters, but acknowledged they are not sure how many people will be impacted by the change – or which lenders will participate.

Some South Florida mortgage brokers said the new guidelines could be of particular benefit in the Sunshine State where residents still recovering from the financial crisis may have jobs, but little reserve money to put down for a mortgage.

"There is a whole wave of buyers who have wiped out their savings to survive the bust," said Kimber White, membership chairman for the Florida Association of Mortgage Professionals and president of its Broward County chapter. "These are good, qualified people who just don't have the cash after coming out of one of worst recessions in our history."

The new guidelines affect loans backed by Fannie Mae and Freddie Mac. The two government-sponsored entities don't make loans, but buy up qualified home mortgages from lenders, bundle them with a guarantee against default and sell them to investors worldwide.

Fannie Mae considers a first-time homebuyer someone who has not owned a home in the past three years. Freddie Mac's definition for first-time homebuyer is someone who has never owned a home.

There is concern that allowing just 3 percent down will lead to more defaults as borrowers have less to lose by walking away from payments.

Both Bank of America and JPMorgan Chase said Monday they are still considering whether they will participate.

"It was just announced today and, like everyone else, we want to look at the details, evaluate it and determine what is involved," said Bank of America spokesman Terry Francisco.

The 3 percent down loans are geared for low to moderate-income buyers, but require borrowers to undergo similar financial scrutiny as in current loan programs, including documented and verified income levels. Only fixed-interest rate, conventional mortgages are considered, and borrowers must get private mortgage insurance.

Freddie Mac is requiring all borrowers to participate in housing counseling, while Fannie Mae doesn't require counseling for all loans.

A mortgage can already be obtained with 5 percent down, but White said the difference between three and five percent can be the difference of whether a person can buy a home. On a $200,000 home, five percent down would be $10,000. Three percent down is $6,000.

"The number one hurdle to increasing homeownership is the downpayment," said Skip McDonough, president of Jupiter-based Family Mortgage. "If you tried to accumulate a downpayment during the past few years, and you're not getting any raises, it's very difficult."

Florida's rate of homeownership fell to 66 percent last year, after reaching a high of 72.4 percent in 2005 and 2006.

Nationally, homeownership was at 65 percent last year, down from 69.9 percent in 2005.

"I think this will bring people back into the market," White said about the 3 percent downpayment.