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For years, the Federal Housing Administration was the king of the low-down-payment mortgage mountain. Now, Fannie Mae and Freddie Mac, the government-sponsored enterprises that provide capital to the mortgage market, are designing loan products for hopeful home buyers with skinny savings accounts.
With Fannie Mae’s HomeReady and Freddie Mac’s Home Possible, a 3% down payment — or what lenders refer to as 97% loan-to-value — is available on so-called conventional loans. Conventional loans are the loan products most often issued by lenders.
Fannie Mae HomeReady Program
Jonathan Lawless, vice president for product development and affordable housing at Fannie Mae, says today’s low-down-payment FHA loans can be “expensive,” with upfront and ongoing mortgage insurance premiums that last for the life of the loan. So Fannie Mae decided to build a competitive low-down-payment loan product of its own.
There are income limits wrapped into the HomeReady program, except in designated low-income neighborhoods. Fannie’s standard 97 LTV loan doesn’t have such restrictions, if at least one borrower is a first-time home buyer. Though the FHA is known for its relaxed lending requirements — including a credit score minimum of 580 — Fannie’s HomeReady has a little wiggle room of its own. It allows parents to be co-borrowers — without residing in the home — and payments from a rental property can be considered as an income source. Borrowers can also have up to a 50% debt-to-income ratio (DTI) and a FICO score as low as 620.
But just clearing the DTI and credit score hurdles will not gain you approval. Lawless says Fannie Mae looks to eliminate “risk layering” — multiple factors that work against the borrower’s creditworthiness. A low credit score would be one. Add a high DTI and you have two strikes against you. It needs to be one or the other.
“It would never be possible to do a [97 LTV loan] with a 620 FICO and a 50 [DTI],” Lawless said. “You’re going to need compensating factors.”
That could mean more cash in the bank, a higher income — or ultimately more than a 3% down payment.
Freddie Mac Home Possible Program
Freddie Mac has its own 97 LTV program, Home Possible. The program assists low- to moderate-income borrowers with loans made for certain low-income areas. Repeat buyers may also qualify.
While Home Possible will continue to be Freddie Mac’s “flagship” affordable mortgage product, Patricia Harmon, senior product manager at Freddie Mac, says there’s even more flexibility in a new program called HomeOne. At least one borrower must be a first-time home buyer, but there are no income limits or geographic restrictions. And Harmon echoes Lawless’ caution regarding underwriting guidelines.
“If a borrower has a 640 credit score, that’s not an automatic approval, nor is it an automatic decline. It would depend on a lot of other characteristics that borrower has,” Harmon says. “The higher the credit score, the lower the debt, the more cash reserves in place — the higher the probability of being approved.”
Options when 3% down is a challenge
“Even though 3% sounds small, as home prices are rising, it’s becoming a bigger and bigger amount and harder and harder to save for,” Lawless says.
Fannie Mae and Freddie Mac are attempting to chip away at that barrier as well, allowing crowdsourced down payments, considering Airbnb income and even lease-to-own programs.
CMG Financial, a lender based in San Ramon, California, has created Homefundme.com, where prospective home buyers can tap the collective pockets of their social network. “They can basically ask their family, friends, associates, colleagues, Facebook friends to give them five bucks here and there” toward a down payment, Lawless says.
Meanwhile, Seattle-based Loftium allows prospective home buyers to rent out a room in their future home to help seed their down payment.
In exchange for a future share of the rent from your room on Airbnb, Loftium will forecast the income and give you a percentage of that upfront, which you can then apply to your down payment.
The borrower will need to kick in 1% of the total down payment; Fannie Mae allows the other 2% to come from Loftium, Lawless says.
There’s even a lease-to-own initiative that Fannie Mae is testing.
“You start as a renter, but you also have the opportunity to buy [the home] at a fixed price in the years in the future,” Lawless says.
More Eligible Properties Could Help
Access to mortgage funding, even with low down payments, still doesn’t solve the problem of a lack of available housing. Conventional financing is also looking to help address this issue.
Fixer-upper funding wrapped into a home purchase mortgage — also with 3% down payments — may be one answer. Lawless says Fannie’s renovation loan program has been “clunky” in the past, but has been recently updated and modified to be easier to use.
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