Higher mortgage rates and higher prices have caused a lot of concern among many homebuyers as to whether they can afford the house of their dreams.
But many housing researchers are not aware of a plethora of low-down loans and buyer assistance programs that can help them become homeowners.
Mortgage industry experts say that the combination of loan programs designed to reduce initial costs and technology accelerating the loan process can save consumers a lot of money.
"We are finding that an increasing number of people are choosing low-down-rate loans and taking advantage of down payment programs," said Michael Fratantoni, chief economist at the Mortgage Bankers Association. "Lenders are also trying to streamline the process of using gift funds as down payments, even though they are always very careful about documenting the source of that money."
Nowadays, many buyers can choose from a wide range of programs offering down payments as low as 1%.
The Home Home Program of the Federal Home Loan Mortgage Corp. (Freddie Mac) allows first-time buyers with income equal to or less than the median of their area to buy with a down payment of 3%. The down payment can be a gift from a member of your family or employer, or come from a down payment assistance program.
"The rapid rise in home prices over the last 10 years means that a down payment is an even bigger hurdle than in the past," said Daniel Gardner, vice president of affordable loans and the "low-income homeowner". access to credit for Freddie Mac.
"Borrowers can also save on loan fees, mortgage rates and mortgage insurance premiums with the Home Possible program, which helps them pay for payments," said Gardner. He recommends DownPaymentResource.com as a complete source of information for borrowers who wish to search for homeowners' assistance programs.
New buyers can also find a 3% down payment option from the Federal National Mortgage Association (Fannie Mae). The agency's Home Ready program for low-to-moderate income borrowers has lower fees and lower mortgage insurance requirements, said Jonathan Lawless, vice president of product development and affordable housing for Fannie Mae.
Fannie Mae and Freddie Mac also have guidelines for loan programs with a 3% down payment that are available to all first time buyers, regardless of their income.
Some lenders, such as Guild Mortgage and Guaranteed Rate, offer down payment grants that allow borrowers to buy a home with a down payment of only one percent of the home price.
As part of these programs, borrowers must take approved courses for homeowner education. In addition, buyers who pay a down payment of less than 20% must purchase private mortgage insurance (PMI), which is automatically canceled as soon as the borrowers have 22% of the capital of their home.
"Private mortgage insurance allows people to become homeowners faster because they do not expect to save 20% of their down payment," said Claudia Merkle, President of National Mortgage Insurance Corp. "Even if you have money, you may want to make a lower down payment and use the money to lower your mortgage rate for a few years to make payments more affordable or stay in the bank. in case of emergency. "
Merkle estimates that the monthly cost of a $ 250,000 home for a borrower with a credit rating of 760 and a down payment of $ 12,500 would be $ 71.25. The same borrower who pays a 10% down payment of $ 25,000 would pay $ 48.75 a month in PMI. The same borrower making a down payment of $ 37,500, representing 20%, would not pay any SMIs.
Low disbursements and no down payments are also available through government agency guarantees such as the Federal Housing Administration (FHA), Veterans Affairs (VA) and the Department of Agriculture (USDA). , which provide loans for properties located in designated rural and suburban areas. FHA loans, which accounted for about 10% of all new loans in the second quarter of 2018, require borrowers to take out mortgage loan insurance for the entire loan.
To evaluate all available loan programs and verify your eligibility, it is best to consult a lender who can compare rates and options according to your needs.
Ability to repay
In the aftermath of the housing crisis, cashless loans and low-down loans, as well as Adjustable Rate Mortgages (ARMs), were among those responsible for the wave of foreclosures.
"Before the housing crisis, some people naturally reacted by asking for an adjustable rate mortgage so their payments would be lower," said Fratantoni. "In 2005, 35% of mortgages were MRAs. But now, borrowers must be able to qualify for the loan at the highest possible rate so as not to have the advantage of being able to claim a lower payment. It is unlikely that the market share of ARM in the market will reach 35%. "
"The big lesson everyone has learned from the crisis is that it is not wise to take increasing risks," said Fratantoni. "It was not just the small down payment; it was also the lack of documentation on loans. Henceforth, when someone buys a home with a low down payment, we make sure that there are countervailing factors, such as a higher credit or a lower debt ratio. high. "
According to CoreLogic, a data analysis firm, mortgage refusal rates have steadily declined as the market and home economics have improved over the course of time. years after the recession. In 2017, only about 10% of applications were rejected, compared with around 19% in 2007.
But Joe Tyrrell, executive vice president of corporate strategy for Ellie Mae, a mortgage software company, said that's because potential borrowers self-select themselves outside the market for housing.
"People still understand that they need a FICO score above 720 and more money for a down payment, so they do not ask for loans because they think their application will be denied," Tyrrell said.
According to Ellie Mae's latest Origination Insight report, 72% of all loans to purchase were granted to borrowers with a FICO score greater than 700, and 47% had a score greater than 750.
Since 2015, the main cause of mortgage refusal is the high debt-to-income ratio, according to CoreLogic.
Borrowers who choose a conventional low-down loan will also need to be approved by the mortgage loan insurance provider.
"It is important not to set the bar as a failure and to approve borrowers who can show us that they have the ability to repay the lender," said Merkle. "The minimum FICO score we need to secure a loan with a 3% down payment is 620. Just a few years ago, we needed a minimum score of 680 and we were not sure not loans with a down payment of less than 5%. "
Mortgage insurance companies base their approvals and prices on the same factors as lenders: credit ratings, debt-to-income ratios, and the amount of the down payment.
"Some lenders start looking for other information than credit ratings," said Tyrrell. "Experian and FICO and Finicity, a financial technology company, are launching a pilot program next year called UltraFico, which will provide banking data instead of fully relying on credit report data. Lenders will be able to view deposit records and overdrafts, which could help people with a strong current account balance but no established credit history. "
Finding new ways to assess credit could help millennia, many of whom do not have car loans and avoid credit cards, said Tyrrell.
Tracking non-traditional income
Although self-employed individuals have always been able to use their tax returns to prove their income, a growing number of borrowers have income from multiple jobs, or additional income from a second job or short-term lease. . Fannie Mae has put in place a loan refinancing program that allows for short-term rental fees, such as the cost of renting a room to Airbnb guests, for qualifying income.
Lenders seek a constant income of two years from a job. So, even if someone thinks that their driving Uber will bring in $ 1,000 more per month for the mortgage, it will not be counted until a lender can generate an income average over two years. Said Tyrrell.
"The pre-housing crisis approach for the self-employed and other people without a W2 standard income was to allow people to use a" declared income "without documentation," said Fratantoni. "It turned out to be a bad idea when it was used too much, and it's outlawed by regulation, and we're seeing an increasing use of technology to track cash flow, find a stable level of income, and measure What a borrower can safely manage over time We have put so much effort into managing the income of the market economy that I think we will see more solutions in the coming years. "
At the same time, Lawless said, lenders are realizing that it would be too risky to settle for a few months of income from a parallel job.
One solution for valuing non-traditional borrowers with fluctuating income from multiple jobs or rental-income properties is to look at their bank statements, said Scott Reise, Regional Guaranteed Rate Manager for the Washington area.
"We can look at a borrower's cash flow to establish an income that we can use to determine if they can qualify for a loan," said Reise. "I think more lenders will be creating niche products in 2019 to serve people who have good credit and are still paying their current mortgage, but who own a business or whose incomes fluctuate. As more and more people are starting businesses, there will be more demand for this type of loan product in the future. "
To increase affordability, some people associate family members, friends and corporations with equity investments to buy a home. Nationally, 17.6% of all single-family home purchases in the second quarter of 2018 were made by co-buyers (several unmarried buyers mentioned in the bill of sale), according to ATTOM Data Solutions. , a database of properties in Irvine, California. .
"There are companies that help people facilitate the process of buying a home as well as legal provisions and even that correspond to potential families wishing to buy together," Lawless said.
Lenders are increasingly using loans with multiple borrowers, not one or two people, which can make all the difference in terms of debt-to-income ratio, said Fratantoni. The credit ratings of all borrowers must be evaluated to approve the loan.
While complexities such as the multiplicity of borrowers and many sources of revenue may complicate the mortgage process, technological innovations simplify the process for both lenders and consumers.
After buying four houses, Adele Hook and her husband were very scared to ask for a mortgage for the holiday home they wanted on Fenwick Island, Delaware. This time, however, they found the experience much softer.
"We did almost everything online, we simply scanned and uploaded documents to the portal and followed the checklist," Hook said. "We discussed lending options over the phone with our lender, Dan Varda [branch manager and vice president of mortgage lending for Guaranteed Rate] and I never even met him in person before closing. "
Five years ago, said Hook, the whole process was a nightmare. This time, it was quick and painless, even though her husband was self-employed and was buying a second home, which often required careful scrutiny from lenders.
"We are investing in Big Data and advanced analytics to serve mortgage lenders, to provide better service to borrowers," said David Lowman, executive vice president for Freddie Mac's single-family business.
Borrowers are already benefiting from an easier and faster loan application process, said Martin Logan, director of information systems at Guaranteed Rate, mortgage lender, now that the documents can be uploaded to a portal secured by consumers or transferred directly from third parties.
"The process is more secure than when people had to fax or email documents," Logan said. "Documents are less likely to get lost and the whole process is faster. Now consumers can give us their social security number and some passwords for their accounts, and we can automatically log in to their bank account and see the updated information. "
Automated verification of income, assets and deposits allows the lender to see more data early in the loan process, which speeds up loan decisions, Tyrrell said. Ellie Mae's digital loan service research estimates that it allows lenders to save about $ 1,000 per loan, which can be transferred to borrowers.
In addition, lenders can use data analysis for automated valuations under certain circumstances, which allows consumers to save $ 500 in appraisal fees, as well as an average of 10 days during the loan process, said Lowman.
Logan said that someday, more and more lenders would use machine learning and artificial intelligence to predict risks.
"The regulations in place to ensure the safety of people and to end discriminatory loans make it hard to rely entirely on technology," said Logan. "While technology is color-blind, technology has an edge, but you may not be able to help marginalized people if your machine is set up to only approve people who can repay the loan."
For now, says Logan, the lending process is faster because computers can instantly access data from financial institutions and the IRS.
"Getting a bank statement online saves an average of six days," he said. "The loan costs are down because of this speed."
Borrowers should expect to see more innovations in the mortgage sector over the next few years, but Lowman stresses that the primary goal will always be to ensure that consumers borrow responsibly and can maintain the property.