After the housing bubble went “pop” in 2007, it became a lot tougher for the average home buyer to qualify for a mortgage. Stung by the huge financial losses, banks tightened their lending requirements over and over for half a decade. The end result is that present-day applicants without a pristine credit score and a lengthy, uninterrupted employment history usually can’t qualify to buy a house. Thankfully, that trend is beginning to change.
Led by recent changes at Fannie Mae and Freddie Mac, lenders have recently adopted new guidelines that make it easier for borrowers to secure loans with less money for a down payment. Not to be outdone, the Federal Housing Administration also followed suit by lowering their monthly mortgage insurance rates by a half a percentage point, amounting to thousands of dollars in savings for future borrowers.
3% Down Conforming Loans
Conforming mortgages are loans that conform to Fannie Mae or Freddie Mac guidelines. The most well-known conforming guideline is the maximum loan amount of $417,000. Other guidelines include borrower’s loan-to-value ratio debt-to-income ratio, credit score and credit history. The two GSE agencies recently took action to make it easier for loans to be classified as qualified or “conforming” mortgages.
In December, Fannie Mae and Freddie Mac rolled out 97 percent loan-to-value financing. This means that only a 3 percent down payment is required to qualify which makes it easier for first-time home buyers who can’t come up with the 20 percent down that’s normally required. In addition, the loans can be obtained with a credit score as low as 620. Standard underwriting guidelines and Private Mortgage Insurance coverage and costs still apply.
.5% FHA Mortgage Insurance Cut
In a related action, the FHA has dramatically reduced monthly mortgage insurance premiums on FHA loans in an effort to make home financing more affordable (and competitive) for consumers. Premiums for FHA mortgage insurance, which is designed to protect all parties in case a borrower defaults on a loan, were cut from 1.35% of a loan’s value to 0.85% for loans. As a result, a typical first-time homebuyer will save $900 a year on their mortgage payments. Existing homeowners who refinance into an FHA loan will see similar savings.
10% Down Jumbo Loans
A mortgage that exceeds the maximum conforming loan amount of $417,000 is usually known as a jumbo loan. For higher-earning home buyers who need to borrow more than the $417,000, an increasing number of jumbo lenders are adding the ability to lend 90 percent of a home’s value with loan amounts up to $1 million. Borrowers will typically be required to have a debt-to-income ratio of 35 percent or less, credit scores of 720 or more, and at least 12 months cash reserves. These programs are now available with most jumbo lenders.
Who’s Behind These Changes?
Fannie Mae and Freddie Mac are Government-Sponsored Enterprises (GSE) and the Federal Housing Administration is a division of the U.S. Department of Housing and Urban Development. These organizations don’t originate loans. Instead, they set the standards for the mortgages they will insure for private lenders, which enable the loans to be bundled and sold to investors. As such, Fannie, Freddie and FHA have an enormous impact on the cost and availability of credit. Many of these changes will also open the door for young millennials to buy a home, who have basically been shut out of the housing market because of their short credit histories.
The overall trend towards easier mortgage rules is a good thing for the housing market, which has endured years of crippling regulation increases. Hopefully this trend will continue and wages will increase, providing sustainable long-term growth for the real estate.