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Fannie Mae, Freddie Mac to lower down payments for homes to 3%

Fannie Mae and Freddie Mac have set terms for letting borrowers put down as little as 3 percent of a home’s cost to get mortgages, a step criticized by Republican lawmakers as a return to risky lending.

Starting on Dec. 13, Fannie Mae will allow the lower down payments for first-time homebuyers and permit refinancing borrowers to reduce equity to 3 percent to cover closing costs, the company said today in a statement. Freddie Mac will begin a program in March giving breaks to lower-income buyers and first-time borrowers who get housing counseling.

“These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices,” Melvin L. Watt, who oversees the two U.S.-owned companies as head of the Federal Housing Finance Agency, said in a statement.

Watt encouraged the move as part of a broader effort to spur lending to minorities, young adults and first-time buyers. Lenders have tightened standards after paying tens of billions of dollars to settle lawsuits over mortgage-underwriting flaws.

Fannie Mae and Freddie Mac, which buy more than half of new home loans and package them into bonds, currently allow down payments as low as 5 percent. Fannie Mae accepted 3 percent down as recently as November 2013 before increasing the requirement in a tightening of its underwriting standards.

The move to allow lower down payments has generated criticism from some Republicans and industry officials. Rep. Jeb Hensarling, R-Texas, the chairman of the House Financial Services Committee, has faulted the idea as a return to the policies that caused the housing crash.

Officials of Fannie Mae and Freddie Mac said rules banning risky loan features will ensure that the new low-down payment mortgages are safe. Only borrowers buying or refinancing a single-family primary residence will be eligible.

Fannie Mae will allow borrowers who haven’t owned a primary residence within the last three years to qualify. Freddie Mac’s program will be limited to people who have never owned a home, those with moderate incomes or buyers in underserved areas.

Borrowers who currently have loans backed by either of the two companies will be allowed to refinance with as little as 3 percent down. Fannie Mae borrowers will be allowed to take cash out for closing costs; Freddie Mac will not.