Are you or is someone you know needlessly missing in action this summer, leaving near-historically low mortgage money at 3½ percent to 3¾ percent on the table? You might be, if you fit this profile:
●You don’t have a lot of extra cash in the bank, and you doubt that you could scrape together enough money for a down payment.
●Your credit scores aren’t great — just under 700 FICO — but that’s mainly because you’re young and don’t have a deep credit history.
Sound familiar? Well, here’s good news. Giant mortgage investor Fannie Mae last week revised and improved its low-down-payment mortgage plan known as HomeReady. Fannie’s competitor, Freddie Mac, has a similar program, known as Home Possible Advantage. Either one could be key to your getting out of your rental apartment and buying a house or condo by early fall.
Check out the basics of Fannie’s program. Start with the 3 percent down payment. There’s no minimum cash contribution requirement out of your wallet as long as you’re buying a single-family house to live in. You can supplement your cash on hand with gifts from relatives or other sources. You can also increase your effective income for mortgage-qualification purposes by including so-called “boarder” or in-house rental payments. Say the downtown rowhouse you want to buy has a long-term tenant in a basement unit who’d like to remain there. That rent could count toward your income.
Another point of flexibility: Say you’re part of an extended family, and there will be other household members living in the house with you who earn incomes but don’t want to be on the mortgage note as a co-borrower. You can use their documented earnings to increase the maximum debt-to-income ratio (DTI) you’re allowed on your mortgage.
Take this hypothetical example. You’re single, earning a solid $72,000 a year, and want to buy a house. However, your current monthly debt load of $2,820 makes you ineligible for most conventional mortgages because your DTI is 47 percent. But if a relative earning $2,000 a month moves in with you, HomeReady may greenlight your 47 percent DTI, even if the relative contributes nothing in rent.
As you might suspect, that kind of underwriting flexibility comes with some requirements. HomeReady and Home Possible Advantage are targeted at moderate-income buyers — first-timers, minority purchasers, extended family groups and other “underserved” borrowers — so not everybody can participate. In most locations around the country, your income cannot exceed the area’s median income. (Both companies’ websites have “look-up” features to help you find the median for your area.) In designated low-income census tracts, there is no income limitation.
Both programs also require some form of homeownership credit education: either an online course or, under Fannie’s latest version, counseling sessions with any of a network of housing counselors around the country.
Where do you get more information or start an application? Hundreds of lenders and brokers are already participating in these programs — Fannie says it has a roster of more than 700 lenders — and they can help. Some of them are actively promoting the program; some are simply offering it as an alternative to loans insured by the Federal Housing Administration (FHA). Mat Ishbia, president and chief executive of United Wholesale Mortgage, told me “we’re doing a lot” of HomeReady mortgages nationwide, including for many millennial first-timers.
Laura Reichel, a senior vice president at Ditech Financial, says shoppers are running the numbers on monthly payment costs — comparing a HomeReady loan with a 3 percent down payment and cancelable private mortgage insurance against a standard FHA 3.5 percent down payment and non-cancelable insurance — and are often opting for HomeReady.
But not all lenders are sold on Fannie’s and Freddie’s programs. Paul Skeens, president of Colonial Mortgage Group, says HomeReady is tilted to favor applicants with higher FICO scores. “Once an applicant has a credit score below 680,” he says, mortgage insurance and other fees combine to make the program virtually unusable, forcing borrowers to go with an FHA loan.
The bottom line: Don’t assume you’re frozen out of the mortgage market. Check out the new generation of flexible, low-down-payment loans that are aimed at consumers like you — if you fit the profile.
Ken Harney's email address is kenharney@earthlink.net.
