After a Thirteen (13) month hiatus, Fannie Mae has officially announced that they will relax their underwriting guidelines, and increase their maximum loan-to-value (LTV) ratio requirement from 95% back up to 97%, which means that eligible Colorado first-time home buyers will only have to come up with a 3% down-payment when purchasing a home.
This is an exciting change for those planning on purchasing their first-home in 2015, as it will provide a lower cost alternative for home buyers who have higher credit scores, but can’t come up with the minimum 5% down that FNMA has been requiring in 2014. Many of these buyers ended up having to utilize an FHA mortgage loan, which isn’t bad, but just a higher cost loan typically.
In the past Fannie Mae (FNMA) had allowed 97% LTV financing across the board, but in November 2013 FNMA made the decision to eliminate their 97% LTV program with the intent to reduce risk.
However, it was quickly pointed out by many experts that if the intent was to in fact reduce risk, this was a nonsensical way to accomplish it, because borrowers still had the options to take out mortgage loans with LTV’s above 95% through the FHA, VA, or USDA, therefore the risk was only shifting from one taxpayer-backed entity to another.
Furthermore, the default rate for 95% to 97% LTV mortgages backed by FNMA, was only slightly higher than for 90% to 95% LTV mortgages, and the default rate for 95% to 97% LTV with higher credit scores was actually lower than the default rate for 90% to 95% LTV mortgages with lower credit scores.
According to recent consumer research conducted by Fannie Mae (FNMA), the primary barrier to homeownership for first-time home buyers is saving money for a down-payment and closing costs. In support of ongoing efforts to expand access to mortgage credit, and support sustainable homeownership, FNMA has announced this increase. With this change, FNMA states that it will offer 97% financing to help first-time home buyers who would otherwise qualify for a mortgage, but may not have the resources for a larger down-payment.
Summary of the Changes
The following is a summary of the policy changes. Fannie Mae will allow LTV rations higher than 95% and up to a maximum of 97% for:
- Standard purchase transactions if at least one borrower is a first-time home buyer, or
- MyCommunityMortgage® (MCM®) purchase transactions if at least one borrower is a first-time home buyer and pre-purchase home-buyer education and counseling is completed.
All mortgage loans must be a fixed-rate mortgage, and secured by a one-unit principal residence. Manufactured homes are not allowed.
I addition, gifts are permissible for the 3% down-payment, however FNMA will now allow the required two (2) months of monthly payment reserves to come from gifts.
Most Conventional Mortgage Loans backed by FNMA, require that the buyer/borrower have two (2) months of the expected monthly mortgage payment in reserves after closing. Therefore, us lenders must not only source and document the money the buyer/borrower will be using for their down-payment, but also for the two (2) months of payment reserves, and so while FNMA is allowing a Colorado first-time home buyer to obtain gift-money for the 3% down-payment, the buyer must be able to document and prove that the two (2) months payment reserves did not come from a gift, or any other source that is not permitted.
Gift and Payment Reserves Example:
If you’re purchasing a $250,000 home, and you qualify for the 3% down-payment program, then you would be allowed to obtain the $7,500 down-payment from a relative or other approved source as a gift. However, since the expected monthly mortgage payment for this example would be approximately $1,700, then you’d have to be able to show that you have at least $3,400 of your own money. Acceptable sources to document the payment reserves include, but are not limited to, checking accounts, savings accounts, money market accounts, certificates of deposits, and retirement accounts such as 401k’s, IRA’s, etc.
As always, should you have any questions regarding these new changes, always free free to reach out by contacting me directly, or completing the contact form on the right, and I will connect with you within twenty-four (24) hours.