Only a few short years ago, 100% mortgage financing by a home buyer was a common transaction. The idea of purchasing a home for virtually (or literally) no money down could be accomplished by combining first and second loans. First home loan financing with three percent down was available through Fannie Mae My Community or Freddie Mac Home Possible mortgage programs. While some of these programs still officially exist, I challenge any buyer to find a mortgage lender who offers one. Now, with sub-prime loans long gone from the mortgage marketplace, most homebuyers with low down payment resources have few options other than an FHA loan.
FHA loans represented a mere 6% of mortgage originations in 2005. in 2009, as a result of a dramatically changed mortgage landscape, they represented more than one-third of the market. The reason is simple; down payment and credit requirements. Conventional loans now require at least 5%, and up to 10% down payments because of penny-pinching banks and stricter private mortgage insurance underwriting. To qualify for conventional loans, you also need near perfect credit scores, whereas FHA requires only 3.5% down and credit scores around 620. Fortunately, there is another alternative that gives FHA a run for their money called HomePath.
Fannie Mae's HomePath program allows buyers to purchase a Fannie Mae-owned house for as little as 3% down, making it highly competitive with FHA. The big benefit to this program is the lack of required mortgage insurance needed on these loans. A typical low down payment conventional loan requires the buyer pay mortgage insurance which amounts to roughly 1% of the loan amount per year. FHA requires both an up-front mortgage insurance premium, as well as a recurring, smaller premium of approximately 0.5% per year. While mortgage insurance premiums are largely tax deductible, they do significantly increase a borrower's cost of funds.
Under the HomePath program, borrowers with credit scores as low as 660 can purchase one of the 86,000 Fannie Mae-owned properties on the market. This is also a win for taxpayers because these government-sponsored entities are able to convert non-producing foreclosed houses into producing assets (mortgage loans). Another benefit to the HomePath program is that an appraisal is not normally required, which would garner a savings of $400-$500 in the Houston area. To sweeten the pot even more, Fannie Mae is offering buyers 3.5% of the property's sale price towards closing costs and/or new Whirlpool appliances through April 30th, 2010.
To take advantage of this program, home buyers should consult an approved HomePath Lender to pre-qualify for a home loan. They can then visit HomePath's Website to search for properties that qualify for this program. Homes that require light renovation get special consideration under this program as the costs of renovations and home acquisitions can be rolled into one home loan. Investors can join in the party. FHA loans are limited to owner-occupied properties, but under the HomePath program, investors can purchase a Fannie Mae property after it has been on the market for 15 days without any accepted offers.
Mike Lesmeister, CRMS, is a licensed mortgage broker and partner with Home Loan Specialists, Inc. a Houston-area mortgage lender specializing in low rate mortgage refinancing in The Woodlands, Spring, Tomball, Conroe, and Houston, Texas.
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