Emerging Mortgages Compete With Government-Backed Loans
The U.S. government wants you to own a home.
FHA loans provide a low-downpayment option to buyers at many income and credit levels. VA home loans and require no downpayment from certain segments of the population.
But government programs are no longer the only way to purchase a home with little or no downpayment.
Conventional mortgage rule-makers Fannie Mae and Freddie Mac have rolled out loan programs that directly compete with FHA and other government-backed loans.
The newer mortgages offer even more on certain points than does FHA.
Conventional programs are fueling the low-downpayment movement. Today, one in four buyers uses a low-downpayment loan to purchase their home according to real estate data website Realtytrac.
Low mortgage rates and expanded lending guidelines are helping today’s renters become owners, whether or not they use a government-sponsored mortgage.
Why Choose Conventional Over A Government-Backed Loan?
At one time, government agencies had a corner on the market when it came to ultra-low downpayment programs.
This is no longer the case.
A parade of new conventional programs have arrived on the market on the tails of success seen from FHA, VA, and Rural Housing loans.
An advantage to non-government loans is the absence of an upfront funding fee.
FHA requires a fee of over $4,000 on a $250,000 loan, which is wrapped into the loan amount. Likewise, VA and USDA Rural Housing loans require an upfront fee of over one percent.
Conventional loans require no upfront fee which reduces the borrower’s initial principal balance and the amount they will have to pay off over time.
In the past, paying an upfront fee was the only option for some borrowers. Conventional loans overseen by Fannie Mae and Freddie Mac required high credit scores and large downpayments that many could not qualify for.
Yet after years of data, the agencies are loosening their guidelines to provide products that mimic the flexibility — and safety — of time-tested government options.
The following programs are gaining in popularity by the day, and are offered by lenders around the country.
HomeReadyTM Mortgages For Extended-Income Households
The HomeReadyTM mortgage allows low- to moderate-income families buy a home with a three percent downpayment.
This Fannie Mae program requires absolutely no money from buyers who have access to a personal gift or qualified downpayment grant. The gift or grant can cover the entire downpayment and all closing costs.
Yet the most advantageous feature of this loan is that families can use all household income for mortgage approval.
Traditionally, loan programs only allow income from borrowers listed on the loan application. This program considers income from applicants as well as non-applicants as long as they live in the same home.
Multi-generational living arrangements are becoming a dominant part of the American housing landscape. According to Fannie Mae, 14 percent of all homes are are “extended-income households” or EIHs.
These homes have grandparents, adult children, or domestic partners living under one roof. HomeReadyTM provides a way for everyone in the home to contribute to the loan approval even if some household members are not on the mortgage application.
This program sets a limit on the buyer’s income to make sure it is offered to families that need it most. However, there are higher income limits, or none at all, in lower-income and high-minority geographical areas.
This new program is a strong example of how lending practices are changing to suit a new generation of up-and-coming home buyers.
Higher-Income Buyers Eligible For Conventional 97
The Fannie Mae Conventional 97 requires just 3 percent down and is available to a different set of home buyers than is HomeReadyTM.
Conventional 97 does not come with income limits as does Fannie Mae’s other 3-percent-down program. Nor are borrowers required to attend pre-purchase home buyer education.
This program is available to buyers who want to make a small downpayment but do not need all the additional flexibility provided by HomeReadyTM.
Home buyers do not have to determine which Fannie Mae program they qualify for prior to application. The lender will examine the borrower’s income, living arrangement, and proposed property location, then determine eligibility for one or both programs.
The purpose of offering two loan programs is to serve a wider population of home buyers with varying income and family makeup.
Pay Less Mortgage Insurance With Home Possible AdvantageSM
The Home Possible AdvantageSM program could be considered Freddie Mac’s answer to Fannie Mae’s Conventional 97.
It, too, allows a 3 percent downpayment but it comes with an advantage of the Fannie Mae programs: reduced mortgage insurance.
Home Possible AdvantageSM mortgage insurance is about $40 per month less than that of Conventional 97, based on a loan amount of $250,000.
The savings can translate into an approval for borrowers right at the 43% debt-to-income limit.
For example, a borrower with $5,000 in monthly income could take on debt of $2,150 per month and still qualify.
If the same borrower’s debt were $2,190 per month they could potentially qualify by switching from a Conventional 97 to a Home Possible AdvantageSM.
Often, a slight change in the applicant’s selection of loan type can make a substantial positive difference.
What Are Today’s Rates?
Mortgage rates are at low levels not seen for most of the history of home lending. This is making homes more accessible through conventional and all other types of loans.
Get a rate quote which comes with an included eligibility and credit check. You could learn that you qualify to buy a home with one of these powerful programs today.