Consumer-friendly options open doors for home buyers

Consumer-friendly options open doors for home buyers

Kenneth R. Harney on Feb 26, 2016

WASHINGTON – So you say you want to buy a home but you’re locked out of the market because you don’t have enough money for a down payment. Or you don’t have adequate savings to meet lenders’ requirements on financial reserves. Or you have a “thin” credit file that lenders find tough to score and accept.

Understood. But have you checked out what’s been going on in the mortgage market lately? Are you aware of the multiple low-down-payment, consumer-friendly new options that have been launched recently – the latest just within the past week?

Maybe not, so here’s a quick overview. Pushed by regulators and consumer groups to expand home loan opportunities for first-time and moderate-income buyers, major mortgage players have come out with nationwide programs designed to turn renters who are creditworthy – but don’t have big down payments or closing-cost cash – into home owners.

The newest option, known as the Affordable Loan Solution plan, launched Feb. 22. It allows for down payments as low as 3 percent, no minimum cash reserves, loan amounts as high as $417,000 and, unlike other low-down-payment mortgages, there are no charges for traditional private mortgage insurance. The latter alone can sometimes add hundreds of dollars a month onto buyers’ costs and make ownership difficult to afford, so this is a big deal. For applicants with thin or no credit bureau files, the program allows for consideration of non-traditional forms of credit, such as monthly rent payments, utility bills and the like. There is no minimum required contribution toward the down payment and closing costs, so applicants can supplement their own cash with gifts, such as from parents, or even use grants or secondary financing that is available through some local government agencies. Significantly, applications won’t go through the usual automated underwriting systems that generate instantaneous approval-disapproval decisions. Instead, they’ll be handled the old-fashioned “manual” way, allowing for more individualized evaluation – and verification – of applicants’ situations.

The program is a joint effort of Bank of America, giant mortgage investor Freddie Mac and the Self-Help Ventures Fund, an affiliate of Self-Help Credit Union, a community development lender. Starting Feb. 22, Bank of America began offering these mortgages through its network of 4,800 local financial centers around the country, as well as through its online and call center channels. The bank plans to sell the mortgages to Self-Help, which will provide early-intervention servicing to borrowers who experience payment difficulties. Freddie Mac will ultimately purchase the loans. Self-Help will provide a financial backstop to cover default losses in lieu of traditional private mortgage insurance coverage.

Affordable Loan Solution mortgages are likely to compete with Federal Housing Administration (FHA) loans, which offer 3.5 percent minimum down payments. But for many applicants, they could prove to be the superior choice. Take this hypothetical case provided by Bank of America- On a $150,000 mortgage with prevailing rates as of mid-February, FHA’s 30-year fixed rate loan with a 3.5 percent down payment and mortgage insurance would require monthly payments of $887.31, exclusive of taxes and hazard insurance. An Affordable Loan Solution mortgage in the same amount with 3 percent down would cost the borrower nearly $105 less per month – $782.47.

However, there are important restrictions that come with the new loan. Borrowers can’t have incomes higher than the area median, generally can’t have total debt-to-income ratios higher than 43 percent, and they need FICO credit scores of 660 or higher. FHA, by contrast, goes as low as FICO 580 on loans with 3.5 percent down and is often more generous on debt-to-income and previous credit issues. Some applicants, including all first time buyers, will need to participate in home buyer education sessions conducted by housing counselors. D. Steve Boland, Bank of America’s consumer lending executive, stressed in an interview that this is a program designed for people “who have established histories of paying debts,” even if not all their histories show up in the national credit bureau files.

The Affordable Loan Solution plan joins two other relatively recent efforts to reach out to credit-worthy, moderate-income renters who don’t have a lot of cash on hand. Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs, which both offer 3 percent minimum down payments and flexible underwriting terms, are available through multiple lenders nationwide.

If you think you might fit the profile, get in touch with several lenders and learn what they’ve got to offer. You just might be surprised.

Bipartisan vote bodes well for condo buyers

Bipartisan vote bodes well for condo buyers

Kenneth R. Harney on Feb 19, 2016

WASHINGTON – Everybody knows that congressional Democrats and Republicans can barely agree on anything. Yet in a rare and fleeting moment of unanimity in the House of Representatives, they recently approved legislation that could expand purchase prospects for thousands of people looking to buy their first home.

By a 427-0 vote, the House passed the Housing Opportunity through Modernization Act, co-sponsored by Reps Emanuel Cleaver (D-Missouri) and Blaine Luetkemeyer (R-Missouri.) Among other provisions, the bill would force the Federal Housing Administration to ease rules and restrictions that have essentially turned the agency’s once-vibrant condominium unit financing program into a minefield for would-be purchasers, condo associations and lenders.

The FHA is the government’s principal agency for helping consumers buy affordable homes. It does not lend money itself but instead insures mortgages made by private lenders. FHA requires as little as a 3.5 percent down payment on loans it insures, allows more flexible debt-to-income ratios than most other mortgage sources and tends to be more lenient on applicants’ past credit problems. As a result, FHA has long been the go-to mortgage source for young, first-time buyers, many of them minorities. The condo unit financing program was especially attractive because in most markets, condo units cost a median 20 percent to 30 percent less than single-family detached houses.

But at the start of this decade, FHA adopted a series of controversial restrictions that have sent its condo mortgage business plummeting. It required condo associations to obtain onerous and sometimes costly certifications of their financial eligibility, plus re-certifications every two years. The agency also stopped insuring so-called “spot” loans on individual units in uncertified condo developments, cutting off unit owners from selling to buyers using FHA mortgages.

Because of these and other restrictions, thousands of condo associations nationwide have dropped out of FHA eligibility altogether. Today, according to congressional estimates, barely 10 percent of all condo developments in the U.S. are eligible for FHA-financed purchases. Total FHA loan volume has shrunk from just under 100,000 condo units seven years ago to 22,800 in 2014.

Under the bill, FHA will be required to-

- Streamline its recertification procedures to make them “substantially less burdensome” for condo associations.

- Lower the minimum owner-occupancy ratio to 35 percent from the current 50 percent, unless the agency adopts and justifies a different minimum within 90 days of enactment of the legislation.

- Abandon its current restrictions on “transfer fees” that many condo associations collect when units are sold. The fees typically are used to support community services and are an important budget item.

These may not sound like dramatic changes, but condo industry experts say they will have major positive effects. Seth Task, a real estate broker and condo specialist with Berkshire Hathaway HomeServices Professional Realty in Solon, Ohio, says the reduction in the owner-occupancy requirement is crucial to the financial health of many existing condo projects where the ownership ratio doesn’t meet the 50 percent threshold. In those developments, no units currently can be sold to buyers who choose or need to use FHA financing. The net effect in many cases, according to Task and other critics, has been to reduce the number of potential buyers for any given unit and ultimately reduce the unit’s market value. Task has seen it in his own transactions, where sellers in uncertified buildings have had to turn down offers from well-qualified FHA buyers, and then are forced to accept below-market offers thousands of dollars less from bottom-fishing all-cash investors who don’t even plan to live in the unit.

The new legislation “will actually increase owner-occupancy” in those buildings, Task predicted in an interview.

The ratio change will also help open up sales in some newly constructed condominiums where the builder still owns more than half of the units being marketed, but can’t sell to FHA buyers because the entire project is ineligible. Ending the transfer-fee ban and streamlining the recertification process should help convince condo associations who have left the FHA fold to reconsider applying for eligibility, according to Rita E. Tayenaka, a realty broker and past president of California’s Orange County Association of Realtors. The reforms “will be a great improvement for condo financing,” she believes.

Bottom line- The bill is great news for first-time and moderate-income buyers, but don’t expect changes overnight. It still must pass the Senate and get the President’s signature, but a 427 to zero bipartisan vote in the House bodes well for both.