The mortgage-finance companies and the Federal Housing Finance Agency said borrowers could be able to get mortgages with down payments as little as 3%, but noted that the loans will be available only to first-time buyers, buyers who haven’t owned a home for at least a few years and those with lower incomes.
Many of the loans will also require borrowers to undergo home-buyer counseling before making a purchase.
Fannie’s low down-payment loan program and Freddie’s program will have slightly different requirements. Officials at both companies said the 3% down-payment loans could be made to borrowers with credit scores of as low as 620, which is the standard minimum, if they had other factors to mitigate their risk, such as lower debt-to-income ratios or high reserves.
Fannie said its program will be limited to borrowers who haven’t owned a home in the past three years. Freddie’s program will generally be available to borrowers who don’t make more than their area’s median income.
Freddie’s program “gives qualified borrowers with limited down payment savings a responsible path to homeownership and lenders a new tool for reaching eligible working families ready to own a home of their own,” said Freddie Mac executive Dave Lowman.
Fannie’s program goes into effect almost immediately, while Freddie’s won’t be available until March. An FHFA official in a call with reporters said that because lenders generally take some time to adapt to new guidelines, they don’t expect the new low down-payment mortgages to be widely available until the end of the first quarter of next year.
Mel Watt, who heads the FHFA, first announced the new program in October along with other changes that some banks say will make it easier for them to make loans. The new program was lauded among some lenders and analysts who have said that mortgage availability has been too limited over the last couple of years.
In a statement, Mr. Watt said that the guidelines “provide a responsible approach to improving access to credit while ensuring safe and sound lending practices.”
Critics have expressed concern that mortgages with low down payments could expose borrowers, Fannie and Freddie to some of the risks that precipitated the financial crisis. If home prices drop, homeowners with a small amount of equity in their homes can quickly owe more than their homes are worth.
Still, even those homeowners don’t necessarily default. According to the Urban Institute, about 0.4% of borrowers in 2011 who made down payments of 3% to 5% have defaulted, no worse than borrowers who made down payments of 5% to 10%.
Fannie and Freddie don’t make loans, but buy them from lenders, wrap them into securities and provide guarantees to make investors whole if the loans default.
Both companies already guarantee loans with down payments of as little as 5%. Those mortgages, as with the new 3% down payment mortgages, require borrowers to pay for private mortgage insurance.
It isn’t yet clear how popular the new down-payment programs will be. Borrowers can already get mortgages with down payments of as little as 3.5% through the Federal Housing Administration, though the costs of such loans have increased markedly over the past few years.
Fannie and Freddie officials said that they expect the low down-payment loans they guarantee to be cheaper than FHA loans for borrowers with higher credit scores. An FHFA official said that they expected the new loans to be a small proportion of the companies’ business.
“We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers,” said Fannie Mae executive Andrew Bon Salle.
This article was originally published by Joe Light of the Wall Street Journal on realtor.com.
While mortgage rates fluctuate daily and the interest rate you’ll pay on a home loan depends on multiple factors, most mortgage experts anticipate an increase in average mortgage rates by the end of 2014.
Before you panic, it’s important to recognize that mortgage rate predictions don’t always pan out. Actions by the Federal Reserve and the economy’s performance could send mortgage rates up or down at any time. Most economists predict mortgage rates will rise by the end of this year to somewhere between 5.0 percent and 5.5 percent. While of course any rate increase has an impact on your monthly mortgage payments, it’s important to recognize that mortgage rates above 5 percent are still historically low. Before the Federal Reserve began its programs to keep mortgage rates as low as possible in response to the housing and financial crisis, mortgage rates had rarely dropped to 6 percent or lower.
According to HSH.com, a website that tracks mortgage rates, average mortgage rates hovered around 7 percent in 2009, 2004 and 1999. Thirty years ago, mortgage rates averaged nearly 14 percent.
Keeping historical rates in perspective should help people realize that the housing market won’t crash if rates sneak up above 5 percent, but we’ve all become accustomed to rates under that 5 percent threshold so it will take some mental and financial adjustments to accept higher mortgage rates.
Mortgage Rates and Affordability
If you’re in a position to buy your home with cash or can easily afford higher monthly payments, rising mortgage rates shouldn’t impact your decision to buy a home. If, like many people, you’re stretching your budget to buy a home, you may need to consider a few options to handle a higher interest rate.
For example, if you’re buying a home priced at $198,000 (the national median price for a home in December 2013, according to the National Association of REALTORS®) and make a down payment of 10 percent, your loan amount will be $178,200. Your monthly payment with a 30-year fixed-rate loan at 4.5 percent would be $903. If mortgage rates rose to 5.5 percent for a 30-year fixed-rate loan, your monthly payment would be $109 more per month, or $1,012.
While $109 more per month may seem affordable, remember that you also must qualify for the loan with a maximum debt-to-income ratio of 43 percent. A higher principal and interest payment on your loan could impact your ability to qualify for a mortgage.
There are some steps you can take to offset a potential increase in interest rates:
- Buy before mortgage rates rise: If you’re ready to commit to a house and a community and financially prepared to buy, it may be best to make your move earlier in the year.
- Make a larger down payment: While this isn’t always possible, the larger your down payment, the less you need to borrow and the lower your payments will be. A larger down payment of 20 percent eliminates the need for private mortgage insurance and will also slightly reduce your interest rate because you’ll have a lower loan-to-value.
- Look for a less expensive home: One of the lessons learned during the housing crisis is the importance of sustainable homeownership. If you’re stretching too far to buy a home, you could end up in a financially unstable position.
- Continue to rent: Delaying your purchase while you save more money, pay off debt and potentially increase your income will help you afford a home in the future.
- Look into homebuyer programs: Most states and localities offer homeownership incentive programs — often limited to first-time buyers or to buyers with low or moderate incomes — that provide down payment assistance or low interest loans.
The best way to learn about your options for purchasing a home is to consult a lender who can discuss loan programs that meet your individual circumstances.
This article was originally published by Michele Lerner of Realtor.com. To see the original article, click here.
Now that the U.S. government is once again up and running, it’s time to take stock of the government shutdown’s impact on the real estate market (especially the mortgage end of that market), and what happens immediately going forward.
One quick red flag comes from the National Association of Home Builders, which reports that newly-built single-family homes were down two points in October.
The NAHB says the decline may be due, in part, to the shutdown; but now that Uncle Sam is back in the chips the decline should be reversed in the coming months.
“A spike in mortgage interest rates, along with the paralysis in Washington that led to the government shutdown and uncertainty regarding the nation’s debt limit, have caused builders and consumers to take pause,” NAHB Chief Economist David Crowe said on Wednesday, just as a deal was being reached in Congress. “However, interest rates remain near historic lows and we don’t expect the level of rates to have a major impact on sales and starts going forward. Once this government impasse is resolved we expect builder and consumer optimism will bounce back.”
Crowe’s view seems to be the prevailing sentiment among real estate industry observers.
To get a good grip on where the real estate market is now, and where it’s going, realtor.com reached out to a handful of industry experts to set the record straight on the following key issues:
What Was the Damage From the Government Shutdown?
“Luckily not much,” says Jason Bonarrigo, a senior loan officer with Residential Mortgage Services in Braintree, Mass. “Most banks and investors continued to close loans and come up with short-term guidelines to work around getting tax transcript records from the Internal Revenue Service, but that’s about it.”
Others aren’t so sure the damage hasn’t been more severe.
“Unfortunately, Washington probably set the real estate market back six months at least,” said Cal Haupt, chief executive officer at Georgia-based Southeast Mortgage. “When they deadlocked previously in July 2011, they stalled a fledgling recovery six months.”
The recent shutdown was worse due to the impact of shutting down the government for 16 days and preventing mortgage lenders from obtaining IRS 4506T documents needed to close most borrowers’ loans, Haupt said.
What Happens Now?
The real estate market can pretty much pick up where it left off 16 days ago, our experts said.
Many lenders continued operating through the shutdown so the FHA did not have an effect on them,” said Malcolm Hollensteiner, director of retail lending at TD Bank. “So now that the FHA is fully open once again, we expect that it will be business as usual.”
Hollensteiner had one caveat: “Because lenders were continuing to process FHA loans through the shutdown, there may be a slight backlog of approvals on the FHA’s end, but that should not cause any significant issues.”
Others agreed with that sentiment.
“The only loans that were directly and immediately affected by the shutdown were USDA loans, which were completely unavailable, and jumbo loans, in those cases where the lender wanted documentation from the IRS,” said Rick Sharga, executive vice president at Irvine, Calif.-based Auction.com.
In both of those cases, loans that were in process will restart now that the agencies are open. “There will likely be some delays in processing and other inconveniences, but things will most likely be back to normal within a few weeks,” Sharga said.
Anything Else Mortgage Consumers Should Know?
Consumers should be aware that the market changes very rapidly and they should be prepared for worst-case scenarios, warned David Williams, a vice president at Right Start Mortgage, in Pasadena, Calif. “Make sure you are working with seasoned loan and real estate veterans who have been through all types of markets, so you can navigate the obstacles with minimal effects,” Williams said.
Perhaps the best advice came from Haupt, who said Americans should shrug off the political shenanigans in Washington, D.C.
“Buying a home at the current lower prices and historically low rates is optimal,” Haupt said. “My advice would be: Do what is best for your family and take advantage of the favorable prices and rates. Rates will rise and property values will follow suit due to limited supply. Don’t let Washington get you down.”
This article was originally published by Brian O’Connell on Realtor.com. To see the original article, click here.