A Fannie Mae vice president wrote recently about some of the company's products designed to help existing homeowners move up or improve their homes if they are unable to sell. Jude Landis, VP for single family credit policy said the focus for fostering homeownership is traditionally on first-time buyers. In today's market however there is a need to confront the struggle many who are already homeowners face in trying to move up from the traditional starter home.
She said a Fannie Mae analysis shows repeat buyers decreased by 40 percent between 2002 and 2014. Even among those buyers with mid-tier credit scores of around 680 to 740 repeat home purchases have dropped dramatically. Landis speculated that in the case of homeowners with the credit eligibility to buy another home it could be low equity in the existing home that is holding them back.
Landis pointed to several loan products offered by Fannie Mae that could help lenders better serve these creditworthy homeowners who are "locked in" by insufficient equity. One would assist them to renovate rather than move, the other to convert their existing home to a rental property and purchase a new principal residence.
The HomeStyle Renovation loan allows homeowners to finance improvements to better adapt their home to lifestyle needs such as updating a kitchen, adding an addition, or retrofitting the home to accommodate an aging resident or one with special needs. These are modifications that can help the homeowner avoid the transaction costs of selling and buying and the expense of moving.
Alternatively Fannie Mae has made it easier to finance a new home while converting the existing residence to an income-generating rental. Updates to the company's Selling Guide change the ways in which underwriters can include rental income in the debt-to-income calculation.
Other Fannie Mae policies and programs expand home purchase opportunities for both first-time and repeat borrowers. A new program called HomeReady offers expanded eligibility to low and moderate-income creditworthy borrowers to finance homes in designated low-income, minority, and disaster-impacted communities. This product features 97 percent financing for purchases of single unit properties and 95 percent limited cash-out refinances. Also available are lower-than-standard levels of private mortgage insurance for high loan to value properties and some income flexibility.
HomeReady also includes a feature for extended-family households that allows lenders to consider income from a non-borrower household member, whether a relative or not, as a compensating factor in accepting a debt-to-income ratio up to 50 percent and also permits consideration of rental income from an accessory dwelling unit, such as a basement apartment, or from boarders. To help support affordability, standard risk-based pricing is waived on any HomeReady loan with an LTV ratio above 80 percent and a credit score of 680 or higher (a risk-based loan-level price adjustment cap of 1.50 percent applies for loans outside of these parameters).
High-cost areas such as parts of California and some major northeast cities are tough places to buy a starter home but have also shown some of the biggest drops in repeat buyers since 2002. Fannie Mae recently updated its high-balance loan policy to increase maximum loan to value ratios, aligning them with the standard eligibility up to 95 percent and removing many policy overlays that applied only to high-balance loan.
Finally, the recent expansion of the company's policy for non-occupant borrowers will allow the inclusion of non-occupant borrowers' income and liabilities for qualifying financing of one-to-four-unit owner-occupied properties without a separate calculation of DTI ratio for the occupying borrower.
Brecht March 3, 2015 U.S. News Money
If you've got the itch to ditch
your landlord and take the leap
to homeownership, mortgage rates are still low by historical standards.
But beware because they are expected to begin creeping higher throughout the
"The cost of renting is
really high right now. Rents have been rising and rising," says Lawrence
Yun, chief economist at the National Association of Realtors. "Renters are
getting squeezed, and some want to convert to ownership.".
The NAR expects 30-year,
fixed-rate mortgages to average 3.80 percent in the first quarter. However,
mortgage rates are forecast to start inching higher throughout the year. The
NAR forecasts an average 4 percent rate in the second quarter, 4.3 percent in
the third quarter and 4.7 percent in the fourth quarter.
Economic forces, including an
improving U.S. labor market and faster economic growth, are conspiring to push
mortgage rates higher this year. "The Federal Reserve is likely to
raise short-term interest rates in the summer, which will be a signal for the
rest of the market for rates to go higher," Yun says.
"There's a window of
opportunity for buying and refinancing at crazy-low rates, but it's
closing," says Gina Pogol, loan expert at Charlotte, North Carolina-based
If this is the year you want to
sign on the dotted line and become a homeowner, experts have several suggestions
to help you move quickly through the mortgage approval process.
The overall lending environment
remains stringent, and the best mortgage rates will be awarded to those with higher
credit scores. Your credit score is a three-digit number generated
using information on your credit report, and generally, the higher it is, the
better. Here's what you need to do to get the best rates.
Mind your credit score. "Minimum credit scores required by lenders have steadily dropped, and
mortgage insurers' underwriting guidelines have also loosened a bit, but it's
still a little tough," Pogol says. "Average FICOs of applicants
approved for home loans continue to come down, but they're still hovering
around the 700 mark. Unfortunately, three-fourths of U.S. consumers have scores
lower than 700."
What's an ideal credit
score? "To get the best rate, strive for above 740. That is the benchmark
for A-plus lending," says Jeannie Meronk, assistant vice president and
mortgage loan officer at First State Bank of Illinois.
Visit your lender before you
hit the open houses. Create a game plan that makes
sense for your budget. It pays to talk to a lender about what
you can afford and qualify for before you fall in love with a home
outside your price range.
"It is really important from
a budget standpoint to be shopping in the right price range," Meronk says.
Just because you qualify for a
certain loan amount doesn't mean that is what you should spend. Consider your
monthly budget, and determine what level of monthly payment feels comfortable.
Remember that there will be other costs relating to homeownership, including
property taxes, maintenance and unexpected repairs.
Also know that most sellers
won't take an offer seriously unless you have been preapproved for a
loan. "Preapproval means actually applying for a loan, having your
credit checked and your income documented. Preapproved means that as long as
the property meets the lender's requirements, you can close," Pogol says.
Don't make any changes to your
financial picture. Once you've been preapproved,
this is not the time to open new credit cards, change jobs, transfer large sums
of money or make big-ticket purchases using credit. "Once you are
preapproved, don't apply for any new credit. If you go ahead and finance furniture,
it can mess up the amount that you were preapproved for," Meronk says.
If you are fortunate enough to
have a parent, in-law or relative
who is willing to gift you some or all of your intended
down payment, be sure to talk with your lender about this. You will need
to document this properly with a letter for your lender.
If you are thinking of buying a
rental property, however, gift money can't be used toward a down
payment. It only can be used for a primary residence, according to Meronk.
If you are self-employed,
expect to jump through more hoops. Be
prepared to provide two years' worth of tax
returns. If your income fluctuated from one year to the next,
underwriters will average the income from the two years. Also, underwriters
will look at your income after your business deductions have been taken.
"It often comes as a
surprise to self-employed applicants that their gross income isn't counted by
underwriters. It's their taxable income that's used. So if you write off every
meal and every vacation as a business expense, that comes off the top of your
income," Pogol says.
Organize your financial
paperwork and keep it up to date. If you are shopping for a home, keep a file and drop in new documents as
you receive them, including your most recent pay stub and all pages of your
"Many times applications
sit on mortgage processors' desks because the borrowers have not supplied
everything necessary to get the file into underwriting. If an underwriter needs
additional information or documents, get that in as quickly as possible. In a
busy office, every time your application needs something else, it may be moved
to the bottom of a pile and not resurface for days," Pogol says.
Call your insurance company. Before you close, you will
need to procure a home
insurance policy. "You need to call your insurance agent and tell
them you are buying a house. You need to secure a first year's home insurance
policy before closing. Until I get your homeowners insurance amount, I can't
tell you the exact amount of your payment," Meronk says.