New Mortgage Lending Rules Could Boost Homebuying Activity

Mortgage Lending RulesWith Freddie Mac and Fannie Mae having announced new lending rules last month that allow home buyers to purchase a home with a down payment of as low as 3 percent, this should allow more consumers to gain access to home loans, when doing so was previously a Herculean task to attain.

Early in December, Fannie Mae and Freddie Mac, both government-sponsored mortgage buyers, announced a new set of mortgage lending guidelines, many of which stand to benefit a number of buyers who had a hard time qualifying for mortgages in the past. During the global financial crisis of 2008, millions of consumers worldwide, including the U.S., lost their savings, or were not able to earn enough money to make their monthly mortgage payments. And while the housing market has enjoyed a decent recovery so far, high home prices continue to serve as a headwind to the recovery, preventing sales figures from reaching their full potential.

However, the new guidelines are in place with another primary goal in mind – to curb the risky, haphazard lending that took place in the run-up to the housing bubble, and helped drive the Great Recession of the late 2000s. The rules are also designed to prevent speculative investment, and on borrowers’ parts, they are required to have enough income for them to repay their mortgages on a monthly basis. Still, the main thing for consumers is that the rules have the potential to entice more first-timers or troubled buyers who previously would not have qualified.

According to a prepared statement from Federal Housing Finance Agency director Melvin L. Watt, the new guidelines “provide a responsible approach to improving access to credit while ensuring safe and sound lending practices.” The FHFA supervises both Fannie and Freddie, both of whom were placed under government conservatorship in 2008 due to the housing crisis.

Watt had made the government’s plans official in October, when he said that Fannie and Freddie had agreed to expand lending after striking up a deal with financial institutions. And while it is expected that a lot of buyers would be able to benefit from being allowed a down payment of only 3 percent, the FHFA did not say when pressed previously how many estimated borrowers could take advantage of the reforms. Some policies may vary depending on the financial institution, but these new loans would all be fixed-rate mortgages with a maximum term of 30 years for primary residences.

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Freddie Mac confirmed that it plans to offer these low down payment products as soon as March 2015, and was quoted as saying that these products may especially benefit low- and moderate-income consumers. Qualifying for a 3 percent down payment would require earning less than the market’s median income, and would also have to pay insurance and receive credit counseling. Monthly payments, on the other hand, should be no more than 43 percent of the borrower’s monthly income.

As for Fannie Mae, the mortgage buyer said in December that it plans to underwrite its loans as soon as possible, and would be pushing its products to first-time buyers. Borrowers will also have to pay insurance and go through financial counseling, on account of the extremely low down payment.