Real Estate Agencies

One of the peculiarities of the lending environment since the housing bubble burst, is how the idea of what makes up a good borrower has changed. Back when conventional mortgages (those loans made to Fannie Mae and Freddie Mac guidelines) were available for anyone with a pulse, a good borrower, that is someone who can get the best rate on a mortgage, was considered a borrower with a credit score of 620 and above. Mortgage qualification was too easy then, and as the housing market floundered, qualifications have continually ratcheted down, making conventional loans harder to get and more expensive for those who aren’t in the best category. It started out with Loan Level Price Adjustments (LLPAs) or price hits, based on credit scores. Now it takes a credit score of 740 or above to get the best rate, and if your score is below 700 the price hits mean a big increase in the rate you will be able to obtain. There are also LLPA price hits for the type of property, so buying a multi-family home is more expensive than buying a single family home. If you buy a condo with a conventional loan, you now need to have 25% equity or down payment in order to get the best pricing on a condo.

With a new change by both Fannie Mae and Freddie Mac, conventional loans are about to get more expensive again, and this time the changes will affect those borrowers who have always been looked at as the gold standard of borrowers, those with excellent credit who are putting 20% down on a home. The new price adjustments are based on the borrowers credit scores and the loan to value (amount of the mortgage compared to the appraised value of the home) and combined loan to value (which includes the total of mortgages, including second mortgages and home equity loans) The surprising thing about this is that there are now price hits for those who up until now have been considered the top credit risks with both top credit scores and down payments of 20%, but less than 25% equity. The price hits get bigger if your credit scores aren’t perfect, and if you have more than one mortgage the price hits will make a big, big difference in your loan pricing.

Most consumers won’t end up paying these price hits in cash. As a rule, they will be built into the loan price and when you are quoted a rate on your mortgage these will be built into the rate. In other words it may not cost you more in fees, but for most conventional borrowers, the rates just went up. These changes go into effect for loans delivered to Fannie Mae and Freddie Mac as of April 1st 2011, but in order to deliver these loans on time, lenders are starting to implement these fees now, or will be soon. The frustrating thing about this is that with the housing market still so weak, why are we (both Fannie and Freddie are government owned entities now) making it harder and more expensive to get financing? The long term plan is for Fannie and Freddie to become self sufficient again, and the plan here is to reduce risk and increase their fee income. Everyone is concerned with reducing risk and it makes sense that if you add more fees and toughen requirements this will help lower your risk. But when borrowers with virtually no risk are targeted, this means we have gone too far.

As conventional mortgages become more expensive and harder to qualify for, FHA mortgages are becoming an even better option for many borrowers. FHA loans aren’t for everyone, if you have 20% for a down payment, even with the price hits, buying conventionally is a better option because it eliminates the mortgage insurance (FHA has mortgage insurance no matter how much of a down payment you put down). But the truth is, most borrowers now, especially first time home buyers, are scrounging just to get the minimum down payment. FHA is now a great option for many borrowers who could be approved for conventional, and if you are buying a home, you should have your loan officer run your situation with both scenarios – FHA is often the better option when you look at the full situation.

Here are some of the features and advantages of buying a home with an FHA mortgage:

• FHA mortgages require only 3.5% down payment.
• With FHA financing you can use a gift for the entire down payment and all the closing costs.
• FHA mortgages allow up to 6% of the purchase price as a seller concession, which can be used to pay for closing costs.
• FHA mortgages rates are comparable to conventional loans.
• FHA allows much lower credit scores than conventional mortgage require, (640 is the required score unless there is a larger down payment). The focus is on the entire credit profile, not just the score, and FHA is more lenient of past problems once you are back on track.FHA has minimal loan level price adjustments or price hits.
• Most borrowers can qualify for more with an FHA mortgage.