This past week, Fannie Mae announced a new loan product which is designed to help first time home buyers buy more home with less money. Does this ring a bell to anybody out there?
The new loan product is not really new however. It first made its’ debut in the early to mid 2000’s and was a precursor to what I like to call the “fogamere” mortgages. You remember, those loans in which anybody who could “fog a mirror” could qualify for a loan? This product however should not be compared with those (not yet anyway). With this loan, the buyer needs only a measly 3% as a cash down payment. That’s less than FHA’s 3.5% requirement! Some other parameters:
1) Only one of the borrowers needs to be a first time home-buyer
2) Fixed rate mortgage 30 years or less
3) Mortgage Insurance applies if loan to value exceeds 80% (This is required on FHA loans also)
4) Minimum Fico Score of 620 (similar to FHA standards)
Now this sounds as good as or better than an FHA loan, but is it? Well, in my opinion yes, because it partially plugs a lending gap that developed in January of 2014 when FHA reduced their maximum loans in Maricopa County to $271,050. Since that time buyers over that price range who could not put up the money for larger down payments did not have many options.
Before that happened FHA would loan up to $346,250, which on top of their 3.5% down payment would enable that borrower to qualify for a home near $360,000. So if you were a seller who had a home valued at between say $280,000 and $360,000 this year, you lost a large pool of prospective buyers for your home because they didn’t have low down payment financing.
The largest benefit of this new low down payment financing will be a resurgence in the 280k+ market, which had been suffering this year.
The other major benefit is the 620 FICO score that would seem to make this every bit as borrower friendly as an FHA loan.
So, the necessary caution between this loan and “fogamere” loans is to not go where the lenders went before, by offering high risk mortgages. These include zero down payment loans, piggy back loans (two loans totaling 100% but eliminating mortgage insurance which are back again), and then “cash back” lines of credit where the moment you close on your house loan, a $50,000 to $100,000 line of credit (or more) was immediately placed on your home for you to use for any purpose. This revved up the market so much that prices began soaring until…it was too late. Hence the crash.
My question is, “Why not make this loan available to all borrowers rather than just NEW home-buyers?”