The U.S. government did quite a lot these past few months, as recent Fannie Mae and Freddie Mac policy changes would now allow consumers to purchase a home with a down payment of as low as 3 percent. Another series of reforms reduced the percentage of insurance premiums for loans backed by the Federal Housing Administration from 1.35 percent to 0.85 percent, with the new rules taking effect at the end of January. While such reforms come with their share of contingencies, it remains very clear how badly America wants so-called “millennial” consumers and other typical first-time buyers to stop sitting the fence and enter the housing market with a bang, rather than with a whimper.
For less affluent first-time home buyers, such policy changes are a godsend. And that is something some of the country’s leading real estate number crunchers agree with. According to Redfin chief economist Nela Richardson, the changes instituted by the FHA, Fannie Mae, and Freddie Mac are a “huge signal” to the broader housing market that there is nothing wrong with lending to first-time home buyers, who typically have lower FICO credit scores and lower incomes than other consumers.
Last November 2014, first-time home buyers took up a mere 31 percent of all previously occupied home sales, a big drop-off from the traditional share of 40 percent and above.
But what is it in for first-time home buyers when it comes to these mortgage reforms? For starters, the FHA’s decision to reduce insurance premiums from 1.35 percent to 0.85 percent is all well and good, but this remains higher than historic averages. The previous increase in premiums was carried out pursuant to increasing the FHA’s capital kitty, which had been depleted as a result of the economic recession. But with premiums back down to 0.85 percent, this potentially opens things up to more consumers, while not changing eligibility requirements for FHA mortgages.
As for Fannie Mae and Freddie Mac’s rule changes, specifically the minimum 3 percent down payment, it goes without saying that not everybody will qualify for such a low down payment. It is imperative that borrowers need to furnish proof that they can repay the mortgage, and borrowers would also have to take out some mortgage insurance. Further, Freddie requires that consumers earn below the median income in order to qualify.
What is quite interesting at the start of the new year is how financial institutions tend to impose draconian standards on borrowers, asking more of their customers than the above mentioned government entities do. This is done in order to re-protect banks in the event they have to repurchase loans sold the government once they go unpaid. This would typically happen when federal agencies are able to ascertain that a borrower’s creditworthiness was not properly vetted. According to EverBank EVP of home lending Thomas Wind, this could involve something as simple as a piece of documentation that was not furnished.
It’s widely considered a good thing that the Obama administration is expending a lot of effort in order to bring first-time home buyers back into the market. But some experts believe consumers should not hesitate to make larger down payments if they are capable of doing so. “Homeownership is about building equity, so anything that buyers can do to get a good start on building equity will help them achieve sustainable homeownership,” opined CoreLogic deputy chief economist Sam Khater.
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