The nation’s largest provider of mortgage money has a new loan program that requires a mere 3 percent down payment. This column answers some of the questions we’ve been getting about the new plan.
Q–Some lenders and mortgage brokers in my area are advertising a new loan available through the Federal National Mortgage Association. The ads say it requires only 3 percent down, and the money can come from my parents or even my church. Do you know anything about this?
A–The new program operated by the Federal National Mortgage Association (commonly called “Fannie Mae”) is named “Flexible 97” because it allows borrowers to make a mere 3 percent down payment. The 500 or so lenders who are participating in the nationwide program can provide a loan for up to 97 percent of the home’s purchase price.
In addition, borrowers under Fannie Mae’s new Flex 97 plan aren’t required to dig into their own pockets or savings accounts to make the down payment. The 3 percent can come from a variety of sources, including relatives, religious organizations or even an employer. This flexibility makes the loans particularly attractive to borrowers who have a good credit record but haven’t been able to save enough for a standard 10 or 20 percent down payment.
Q–If I get the down payment from my parents or my employer, can it be in the form of a loan rather than a gift?
A–Yes. The cash you need for a down payment can either be a gift to you that comes with no strings attached or a loan that you must eventually repay. That’s another feature that sets the Flex 97 plan apart from many other types of loan programs, which require anyone who puts up the down payment to sign a “gift letter” stating that the money will never have to be repaid.
Q–Is there a limit on how much I can borrow under the Flex 97 program?
A–You can borrow up to $227,150 under the new plan, assuming that your credit is good and you can prove that you earn enough to handle the monthly payments. By comparison, the Federal Housing Administration’s most popular low-down-payment plan is limited to a maximum $86,317 loan amount in low-cost housing areas and $170,362 in the nation’s more expensive markets.
Q–What is the interest rate on Flex 97 loans?
A–The rate on Flex 97 home loans is roughly the same as rates offered on traditional 30-year fixed mortgages, which currently hover around 7 percent.
Q–These Flex 97 mortgages sound too good to be true. What’s the catch?
A–The new loan program should attract buyers from across the nation, but it clearly won’t appeal to everyone. You must have a near-sterling credit record to qualify if you plan to have a relative or organization make the down payment for you, especially if the down-payment cash equals only 3 or 5 percent of the purchase price of the home. A bigger down payment may be required if you’ve got an average credit rating, and you can probably forget about applying for a Flex 97 if you’ve got a recent bankruptcy or other big blemish on your record.
Of course, you can’t qualify for a Flex 97 loan (or any other mortgage) if you cannot prove that you earn enough to pay the money back. Fannie Mae generally won’t accept a loan if more than 28 percent of your pretax monthly income would be needed to pay your monthly mortgage or 36 percent of your earnings would be needed to pay the mortgage as well as make the minimum payments on your credit cards and other debts. Many lenders offer other types of loans for borrowers who can’t meet such strict standards.
Q–I am selling my current home for a big profit, so I can make a 20 percent or even 50 percent down payment on my next house. My credit record is perfect. Should I get a Flex 97 loan to finance my next purchase?
A–Probably not, unless your goal is to keep your down payment as small as possible and you need to borrow less than $227,150 to buy your next home.
Your letter states that your credit record is excellent and you can easily afford to make a down payment of 20 percent or more. With those types of credentials, you’re in a great position to negotiate with local lenders to get a one-quarter or perhaps even a one-half percentage point discount off the rate they’d charge to a typical borrower who makes a small down payment and has a less-than-golden credit rating.
Q–I am a first-time buyer and the Flex 97 program sounds good to me. How do I apply?
A–Fannie Mae, like the FHA, doesn’t make loans directly to borrowers. Your application must be filed with a lending institution that’s taking part in Fannie Mae’s Flex 97 program.
There are several ways to find a Flex 97 lender. Start by calling the financial institution that holds your current mortgage or provides your checking or savings account. Supplement your search by personally contacting other lenders in your area or by calling a few local mortgage brokers. Most mortgage brokers represent several lending institutions, so they know which ones offer the Flex 97 plan and can discuss your other borrowing options.
You should also call Fannie Mae’s toll-free number (800-732-6643) for a copy of its information packet that provides all the details about its new program. The company may also be able to direct you to a lender who makes Flexible 97 loans in your neighborhood.
Q–Are you the same David Myers who works as a real estate agent in our neighborhood?
A–No. I personally know six agents and three developers across the nation who share the same name. There’s obviously a lot more money in building and selling homes than there is in writing about them.
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Write to David Myers, P.O. Box 2960, Culver City, Calif. 90231-2960.
