Wells Fargo & Co. (NYSE: WFC), the nation’s biggest home mortgage lender, on Thursday announced a new home loan program that requires a down payment as low as 3% for a fixed-rate mortgage, lower out-of-pocket costs, lower credit scores and incentives to help first-time and low- to moderate-income buyers.

Earlier this week we noted a report from CoreLogic noting a drop in mortgage loan applications from consumers with low credit scores. Wells Fargo’s so-called yourFirst Mortgage program is aimed squarely at that market.

The bank’s head of home lending, Franklin Codel, said:

We developed yourFirst Mortgage℠ to serve the broad population of qualified first-time homebuyers, including the low- to moderate-income customers and the diverse Millennial population – which is more than 2/3 of first-time homebuyers today. This is good for our customers and benefits the economy by building stronger communities through sustainable homeownership.

The new program requires a minimum down payment of 3%, a minimum FICO score as low as 620 and a debt-to-income ratio of 45%. That ratio could rise to 50% depending on additional factors, according to Inside Mortgage Finance.

Unlike many subprime and Alt-A mortgages issued in the bad old days, applicants to the program must be able to demonstrate their ability to repay and the loans are fully documented and underwritten. Guidelines for credit history have been expanded as have rules on other income that can be used to qualify for a loan. Consumers who make a down payment of less than 10% may earn a reduction of 0.125% on a mortgage loan interest by completing a homebuyer education course offered a certified U.S. Department of Housing and Urban Development-approved counselor.

Wells Fargo will sell the loans to Fannie Mae. Andrew Bon Salle, an executive at Fannie Mae, said:

We are pleased that Wells Fargo chose Fannie Mae as its partner on this important program. Fannie Mae is proud to support our customers’ efforts to make sustainable affordable housing a reality. … We are a leader in serving this market and we are committed to responsible lending practices that allow our customers to lend with more certainty and less risk. The yourFirst Mortgage℠ product gives creditworthy borrowers access to affordable mortgage financing and guidance to help them succeed for the long term.

The CoreLogic report indicated that consumers were self-selecting whether or not to seek a mortgage. If the Wells Fargo program is successful, we should see more sales to first-time buyers when inventory rises as owners of entry-level homes put their homes on the market instead of remodeling them. That could raise the inventory of homes for sale closer to historical levels and keep price increases moderate.

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