The Federal Housing Finance Agency, regulator of Fannie Mae and Freddie Mac, is initiating changes in lending rules that would allow more potential buyers to qualify for home mortgages, especially in high-demand markets like Massachusetts. These changes should enhance buyers’ ability to participate in the housing recovery.
Fannie Mae and Freddie Mac are not themselves mortgage lenders but are potential purchasers of loans from banks, credit unions, and other financial institutions. This frees up funds so the direct lenders can make loans to more aspiring homeowners. To qualify to sell loans to Fannie or Freddie, the lenders must follow guidelines laid down by the federal agencies or face the possibility of being forced to buy back the loans. During the recession and the decline in property values and the plague of foreclosures, Fannie/Freddie imposed stringent requirements on borrowers and lenders. In response, banks adopted additional requirements—called “overlays”—that impose even more rigorous requirements on borrowers. Although Fannie/Freddie loans currently require a FICO credit score of at least 620 to qualify, most lenders demand a credit score of 740 or more for a borrower to qualify for a loan.
Although interest rates are currently the lowest they have been in 18 months, the overlays have excluded many potential borrowers from the real estate market. This in turn has led to a decline in home sales, slowing the housing recovery. In fact, home sales have been down in six of the past nine months in 2014 in Massachusetts and are down nationally too.
From 2003 to 2007, Fannie Mae and Freddie Mac loosened their lending guidelines to the extent that many applicants qualified for mortgages who could not actually afford to repay them. Then, in 2007, after the real estate market began to tumble, both agencies tightened their guidelines. Now, realizing that their guidelines were strangling the housing finance market, they are loosening them again. It has not yet been announced exactly when the changes will take effect, but it is likely that it will be the beginning of 2015. The most significant offer is mortgages for as little as 3% down instead of 5%, meaning lower down payments for buyers. Although FHA has offered a 3.5% down payment option, it is much more expensive with the addition of required premiums and mortgage insurance.
The intent behind the push to revise the rules was to provide clearer guidance for lenders to manage their risk, while making more financing available to potential home buyers. FHFA is also working to develop sensible and responsible guidelines for mortgages with loan to value ratios between 95 and 97 percent to increase access for creditworthy but lower-wealth borrowers.
For many borrowers, the difference between a down payment requirement of 3% or 5% could spell the difference between purchasing a home now or having to postpone the purchase or relinquish hope of being able to make it in the future. For the typical borrower, a 5% down payment on a $300,000 home would be $15,000, while a 3% down payment would be considerably lower: $9,000. Increasing the number of eligible borrowers and therefore buyers would be welcome news for the housing market, especially in Massachusetts, where it would accelerate appreciation in home values, since more borrowers will be able to purchase a home and take advantage of low interest rates before they go back up.
As experienced Massachusetts real estate attorneys, Pulgini & Norton can help you with all of your real estate legal needs. If you have a question regarding buying or financing a home, give us a call today at 781-843-2200 or contact our office online, and we can help legally clear the way for you.
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