3% down with FICO of 620

I guess we didn’t leaven from the recent mortgage crisis. Fannie Mae is backing the whole program, so tax payers are on the hook. I guess they are desperate to collect mortgage insurance payments to boost their income. At least until the defaults start happening, and they have to payout claims.

http://www.cnbc.com/2016/05/26/wells-fargo-launches-3-down-payment-mortgage.html

How about those started income loans? The best I found requires 35% down.

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Oh no…here we go again

Sheila Bair: 3% down payment mortgage comes with risk

However, “you’re exposing yourself to risk if home prices take a dip.”

I don’t get her logic. What risk is she talking about that would not also apply to a person who puts 20% or more down in case of house pricing fall?

Some details on this from the original link. Maybe the following will prevent bad loans.

Wells Fargo will service the loans, but Fannie Mae will buy them, and that means the loans must be underwritten to Fannie Mae’s standards, which are high. Jonathan Lawless, vice president of product development at Fannie Mae, admits that a borrower with a 620 score would be unlikely to qualify.

“It is true that it’s a rare event that we see borrowers at that low a FICO score,” he said. “There needs to be compensating factors — one is to have a lot of money in the bank or a very good debt to income ratio.”

3% down requires a much smaller drop for the borrower to be underwater vs. 20% down. How many times in history have home prices dropped 20% vs. 3%?

I buy a home for $100000
The house drops by 3% and now at $97000

Now 2 situations

  1. I paid 3% down - I sell the house at $97K & walk away with $3K loss
  2. I paid 20% down - I sell the house at $97K & walk away with $3K loss

What is the difference?

Lower my downpayment less is my skin in the asset & more chances of my walking away with minimal loss when asset falls by much more than my downpayment %.

Hence lower risk(to the borrower) with lower downpayment rather than higher?

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I think the difference is purely psychological. The “sunk cost” fallacy if you will. Because you put down 20% you are more emotionally invested than putting 3% down. It’s illogical, yes, but people are illogical. So you are more likely to walk away with little skin in the game.

@Roy321 if the market drops 5% after buying with 3% down the owner is underwater. With 29%+ down a 5% market drop doesn’t drop the buyer into underwater status.

Over the years we’ve been underwater a few times and it can be scary and often lead to stupid decisions. As we saw during the last downturn people walked away and did crazy things even when they were capable to pay.

One of our home buying criteria is rent ability during down markets. It keeps me sane.

If you talk about “selling”, then the person who bought with 3% down is basically underwater immediately after close of purchase escrow.

Because selling will cost more than 3% in commissions and closing cost.

Some people don’t like to pay off a loan if the loan is secured by an asset that’s worth less than the loan amount. By that logic, they should stop paying their car loan as well, since (new) cars (purchased with very little down) are worth less than the loan amount once they are driven off the lot.

I do think that 3% down loans are not a good idea. I assume that these types of loans are made to people who do not have much cash on hand.
This loan product is offered to bring in more buyers. If people cannot come up with more than 3% down payment, how can they pay for the maintenance/ repairs of the house, which is the lender’s security? Any decision maker lending out their OWN FUNDS would be very concerned about this.

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That’s not the real world. The 3% down person usually has no money.
The house sells for $97k or net $92k after closing cost. The lender loses $5k and the borrower $3k.

I think low down loans can make sense depending on the buyer. Even rent to own works under certain circumstances. There are many variables at play. There are no sure bets.

The issue with low down mortgages after the bust was that many were option arms with negative amortization and no doc/stated income. I doubt if more than a handful were ever verified. Even our full doc refinances weren’t verified. The vacation house closed before the appraisal was completed. Our LO pulled something to do that and wouldn’t say what. After many transactions with her we stopped.

Every time I’ve signed a purchase agreement I didn’t sleep for days as I questioned whether it was smart or not. I’ve come understand that to be a good thing. We have backed out of deals that started with that questioning.

My first home was an assumption of a $77k VA loan. Market was down and the sellers wanted out. The loan rate was well under market rate (7% when loans were around 13%) and I paid closing costs. I had roommates and did very well with that place. At the time people thought I was crazy. Maybe I was for over spending. The mortgage was similar to the rent in my tiny apartment. Getting roommates allowed for increased savings. I traveled 60% of the year for work which reduced roommate issues.

After the dot com bust my spending problem (inability to take money out of savings) got worse. Between the two of us we were laid off five times in two years. Our expanding family had outgrown the house and we could rent the place at a profit. It has turned out to be an excellent rental. At the time we thought we would return one day. Now we don’t know.

We bought a 3k SF house with 5% down. That spending issue. Two years later we relocated (job) and used the proceeds of that sale to buy with 20% down and purchase the empty lot next door with a nice chunk of change leftover. If it wasn’t for the lunatic neighbor we would have stayed.

It’s not just low down payment but lower credit score too. People in that credit score range have had issues. They have late payments, written off accounts, defaults, etc. So now you have someone with suspect credit history and minimal down payment. That’s not going to end well. My aunt some how always gets a mortgage on these deals. She’s foreclosed on every mortgage she’s had. Yet, banks are always willing to loan her money again.

I’d expect a minimum FICO of 740, 780, or even 800 for a program like this.