The recession and the housing crash produced a ripple effect of consequences. In the wake of the chaos there was a lot of finger pointing and discord. Reaching a compromise or finding a feasible method of fixing everything seemed highly unlikely at that point.
Eventually a consensus was reached about the need for a comprehensive overhaul of the financial system. There was also general agreement regarding the benefit of having borrowers make sizable down payments on their homes. This was based on the logic that people with more invested in a property would be less likely to default.
Six years later, the overhaul has finally been completed. Responding to an avalanche of criticism from consumer advocates and lending institutions, the regulators did not include a requirement in the legislation for borrowers to make a down payment.
This is incredibly positive news for anyone who is seeking a low down-payment loan or seeing a continued recovery of the housing market. Regulators are hoping that private investors will view the new rules in a favorable light and the result will be more lending overall.
Although I have been helping people with down payments averaging 5 percent for some time, I believe that offering more options for borrowers with lower down payments will provide a range of benefits. Relaxing the burdens placed on lenders and private investors brings more capital into the game, more homeowners with a vested interest in their communities, and a more attractive climate for related businesses, such as contractors, home improvement stores, interior decorators, architects, developers and real estate agents.
Timothy J. Mayopoulos, chief executive for Fannie Mae, the largest government mortgage entity, announced recently that the organization is considering moving forward with making low down-payment loans (around 3 percent) a possibility for borrowers. According to Mayopoulos, the low down-payment options available through Fannie would cost borrowers less than similar loans available under other government programs.
Fannie Mae and Freddie Mac, another large government entity that guarantees mortgages, operate under a charter that only allows them to back loans equal to about 80 percent of the value of the underlying house. In the past many other lending organizations followed the 80 percent loan-to-value rule, forcing borrowers to make a 20 percent down payment on the purchase price of their home.
Luckily Fannie Mae and Freddie Mac have been able to circumvent this rule by requiring borrowers to buy private mortgage insurance on top of the down payment, effectively making up the leftover portion of the 20 percent. Mortgage insurance is certainly not to a borrower’s advantage, but it has made home ownership an option for many people who might not have qualified otherwise. I covered the topic extensively in my last article.
Intending to make it easier for low- to moderate-income borrowers to own a home, Fannie Mae recently launched MyCommunity Mortgage. For borrowers with incomes that fall below the average for their area and meet a number of additional requirements, the MyCommunity Mortgage program allows for reduced mortgage insurance premiums and lower interest rates. According to an article in Forbes, the median household income for Wilmington is $45,131.
Acceptable sources of down-payment funds and closing costs for participants in the MyCommunity Mortgage program include personal gifts, gifts or grants from a qualified entity, employer assistance and even Community Seconds® mortgages, another program offered through Fannie Mae that allows for a combined loan-to-value ratio of up to 105 percent.
The Community Seconds® program is particularly exciting news for those who qualify since it makes it possible to purchase a home without a cash down payment. Of course, lenders offering low down-payment options are using every method available to them to ensure buyers are qualified. To avoid the fiasco of 2008 and the high rate of defaults, lenders will be applying increased scrutiny to other factors associated with homebuyers, such as credit scores, amount of reserves in bank accounts, and income levels.
Understanding that a number of studies have shown that credit scores can have more of an impact on default rates than the size of a down payment, it makes perfect sense to ease the flow of credit for borrowers. After all, what is the point of a credit score if it doesn’t tell you more about a person’s emphasis on paying their debts?
As I mentioned previously, I’ve been helping people buy homes with 5 percent down payments for years. The increased availability of loans with 3 percent down payments might not seem like a big deal, but in the course of my 15 years in this business I’ve witnessed numerous occasions in which a factor of 2 percent meant the difference between a deal going south and a successful closing.
The bottom line is that there are people out there with good credit scores and great jobs who don’t have a sizable down payment. It’s great to see that homeownership is becoming a more feasible and attractive option for them, and I’m hopeful that making more low down-payment loans available will have a positive impact on the stability of our communities.
If you are wondering if owning a home could be within your reach, contact me over the phone or through email and I’ll be happy to go over things with you. I enjoy helping people find their piece of the American dream.
Patrick Stoy has 15 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.
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