Conventional 3% Down Purchase w/ Job Loss Protection
Conventional mortgages are standard loans that can be obtained from any lender—they are in no way insured or guaranteed by the government like FHA, VA, or USDA loans are. They do, however, follow the guidelines and requirements of the government entities known as Freddie Mac and Fannie Mae. These Government Sponsored Enterprises (GSE) has been tasked with maintaining the industry’s liquidity.
Because conventional loans are not in any way guaranteed by the U.S. government, the often have stricter requirements and have higher interest rates. The down payment is often the biggest hurdle—it can be as much as 20%. However, in 2014, a new Fannie Mae program went into effect that allows first-time homebuyers to pay as little as 3% down. This incredibly low down payment amount was previously only available to those who qualified for a FHA loan, but now anyone who qualified for a conventional loan can take advantage of it. These loans may also come with cheaper mortgage insurance, too.
There are, of course, some stipulations on this 3% down payment. The biggest is that the money must come from the buyer—the funds cannot be a gift from a relative. A relative is allowed to gift funds to the buyer for the down payment, but the buyer must also put down 5% of their own money. With an FHA, however, the required down payment (3.5%) can be a gift.
While many first-time buyers, especially young buyers, will need to go with an FHA loan because they do not have the credit history needed for a conventional loan, those who do qualify may find that conventional loans are the better option. This is because they do have lower closing costs, lower underwriting fees, and do not have any up front mortgage insurance premiums.
Job Loss Protection
Many Fannie Mae conventional mortgages also include job loss protection insurance. This protection kicks in if the homeowner loses their job involuntarily (i.e., the company downsides or closes an office). In this case, the person may receive as much as $1,500 a month towards their mortgage payment for as much as six payments. These payments do not have to be consecutive, either, so this protection can be used several times over the two-year coverage period. Borrowers with job loss protection don’t have to worry about wiping out their savings or defaulting on their mortgage in the event of job loss.