A popular mortgage program for central Texas borrowers has been the conventional 3% down program (often called 97 LTV for “loan to value”). However, this program is going away November 14th of this year when Fannie Mae releases an update to the guidelines that mortgage banks must follow (DU Version 9.1).
With this deadline approaching, now my be a good time to purchase a home before this program goes away for good.
There are many reasons a borrower may chose to reduce their down payment with the 3% down program. Here are a few:
- Use the extra money for upgrades to the home
Often buyers plan to do upgrades to a home (replace kitchen counters, remodel a bathroom or just replace carpet or wood floors). However it can be difficult to get financing for upgrades or a remodel after closing. So some buyers just reduce their down payment as a way to fund these projects. Certainly better than putting them on a credit card, right?
2. Pay off other high interest debt
With interest rates at all time lows, it might make good financial sense to pay off higher interest loans like credit cards, revolving accounts and even an auto loan. Mortgage interest is tax deductible (in most cases) whereas most other debt isn’t. So using available funds to pay down high interest debt may save in the long run. In the short run it can increase cash flow as paying down or off debts can reduce the associated monthly payment. This can often help with qualifying for a mortgage as well.
3. Cover closing costs rather than asking the seller to contribute
In today’s competitive market, buyers are often faced with a multiple offer situation. So finding ways to make their purchase offer more attractive can make the difference in getting a home under contract. So if a borrower has exactly 5% for down payment but would need to ask the seller to pay a portion of the closing costs, this can reduce the attractiveness of the offer. So utilizing the 3% down program allows the borrower to use the 2% reduction in down payment to cover most if not all of the closing costs…thereby reducing the amount needed from the seller.
There are other low down payment programs available like an FHA, USDA, VA or state funded Down Payment Assistance Programs (TDHCA or TSAHC). While these are great programs, they generally carry slightly higher fees or mortgage insurance costs than a conventional loan. Please contact me if you have any questions about the 3% down Fannie Mae loan program.