If so, and you don’t have piles of money, you should be aware of changes in the lending guidelines and policies of the Federal Housing Administration (FHA), Fanny Mae and Freddie Mac. These groups help to make homes more affordable and can now make it less costly for first-time buyers!
One major change is regarding mortgage insurance. When a buyer borrows more than 80% most lenders will require mortgage insurance that will cover the loan until it is paid down to the 80% level. FHA-backed loans have not reduced the premiums on this mortgage insurance to 0.85. This is an estimated savings (for the average homebuyer) of $900 per year and can directly affect the buyer’s ability to purchase as the mortgage insurance premium is calculated into the long-term debt ratios used for mortgage approval.
Fannie Mae and Freddie Mac have also loosened down payment guidelines, allowing some prospective homebuyers to be approved with a down payment as low as 3%. These are huge incentives to prospective first-time homebuyers, a class of buyers that has seen a marked decrease in the last few years. Historically first-time homebuyers make up about 40% of the home buying public. Recently this number has dipped as low as 31%, a huge impact on an industry struggling to recover.
Here are some points to remember when considering a home loan backed by Fannie Mae, Freddie Mac or guaranteed by the FAH:
1. The 0.85 mortgage insurance premium is still higher than what would be charged by a conventional lender.
2. Not all borrowers will qualify for a 3% down payment loan. Prospective borrowers must have enough income to afford the monthly payments (that seems a no-brainer). The home must be the buyers’ primary residents.
3. Some of these programs require that the buyer earn less than the median income (not sure if this is location specific or not).
This last item may eliminate some borrowers immediately as their income may be too great, but typical for their area, or, it would not be enough to carry a mortgage on a house in that locale, due to home prices.
Another thing to keep in mind is that traditional lending institutions may have more stringent loan requirements. This is may have been triggered by the government’s imposition of a “loan buyback” program, where the lender may be required to take back the servicing of the loan because of some snafu in the paperwork, etc. Regulators are looking into ways to make this scenario easier for banks to navigate, which may ease lending requirements. Stay tuned.
Remember the lifetime of the loan in considering its final cost. A longer loan at a lower rate will cost you more in the end, provided you stay in the home for more than the national 3-5 year average.
In the end, it is still a better scenario for buyers to bring more money to the table. Buying a home not only provides a place to live, but an opportunity to create equity over time and long-term security. Mortgage rates on all fronts are expected to continue to be in the lowest ranges in history but home prices are anticipated to rise. If you are considering your first-time home purchase, now is the time. Real Estate continues to be one of your best investments. And you can sleep in it!