By Mike Miles
Last week I wrote about how the expansion of credit risks was not resembling a re-emergence of the factors that led to the housing crisis. As a way of piggy-backing on that idea, today’s post will discuss some updates to low-down payment mortgage options.
Both Fannie Mae and Freddie Mac have competing low-down payment options. Fannie Mae’s version is called HomeReady and Freddie Mac’s version is Home Possible. These are loans where as little as 3 percent is required as a down payment. Freddie Mac ratcheted up its version by allowing banks to kick in up to 2 percent leaving the buyer with only 1 percent owed at closing. It didn’t last long though. Late last year, Freddie Mac announced it was discontinuing the allowance of banks contributing the equity at closing.
These loans will phase out between June 1 and August 30 of 2018. This announcement will make some of you happy, while others will be disappointed. For those that are disappointed that the 1 percent down payment option is leaving the marketplace, there is still the 3 percent down option available. Gone only is the bank kick-in.
Personally, I think this is a good thing. In exchange for the kick-in, banks were requiring a higher interest rate. So, in my opinion, buyers of this program were paying excessive interest over the life of the loan to avoid the full 3 percent down payment.
The good news is that both Fannie and Freddie’s affordable programs will allow for any of the 3 percent owed at closing to be a gift from an allowable source. Getting an allowable gift does not force the interest rate to be any higher than normal. One thing to be aware of is these affordable down payment loans do have income limitations. If any buyer listed on the loan application earns more than what’s allowed (based on the homes geographic location), the buyer won’t be eligible for these programs. Think of it as over qualifying.
If a buyer over-qualifies, Fannie Mae will still allow a standard conventional loan with a 3 percent down payment. However, the private mortgage insurance (PMI) is rated on the equity position at closing (97 percent). Mortgage insurance is more expensive for lower down payment loans with exception of the affordable products mentioned above (HomeReady and Home Possible). Those programs allow for the PMI to be rated at a 10 percent equity position instead of the 3 percent equity position as it closes.
Is this clear as mud? If so, that’s totally normal. It’s also a reminder at the importance of making sure you’re dealing with a loan officer that understands every detail of every loan program. You’d be surprised at how many don’t. Give me or my team a call to discuss your options.