Uncle Sam wants to make it more affordable for Americans to buy their first home.
The recent policy changes affect government-backed home loans and could make it less costly for first-time buyers to come up with a down payment or to afford private mortgage insurance.
The changes center on the Federal Housing Administration and mortgage giants Fannie Mae and Freddie Mac.
Last week, the Obama administration announced that the premium that borrowers with an FHA-backed home loan must pay for mortgage insurance will be dropped to 0.85 percent from 1.35 percent by the end of this month.
The move is estimated to save the average homebuyer $900 a year, as well as help save money for homeowners looking to refinance their mortgage.
That followed an announcement last month that Fannie Mae and Freddie Mac, which buy home loans from lenders and then package them as securities to be sold to investors, would be adopting new guidelines on down payments.
Specifically, the change would enable some borrowers to buy a home with a down payment as low as 3 percent, down from a minimum of 5 percent.
“These combined actions between the FHA, Freddie Mac and Fannie Mae are a huge signal to the market that it’s OK to lend to first-time homebuyers,” said Nela Richardson, chief economist at real estate brokerage Redfin.
The share of U.S. homes bought by first-time buyers has been below average through much of the housing rebound. First-time buyers accounted for 31 percent of all previously occupied homes bought in November. That’s well below the 40 percent that has been historically common.
Many would-be buyers have insufficient savings, poor credit or both.
And the new policies would be of only limited help to those in such situations.
Here are three things to keep in mind if you’re considering applying for a home loan backed by Fannie Mae, Freddie Mac or guaranteed by the FHA:
The fine print
The FHA’s new 0.85 percent mortgage insurance premium is lower, but remains higher than historic norms. The rate was initially increased to raise FHA capital reserves, which took a hit during the housing crisis.
And the rate cut will do nothing to change the eligibility requirements for FHA-backed loans.
Not all borrowers will qualify for the 3 percent down payment on a home loan guaranteed by Fannie Mae and Freddie Mac.
Under the terms announced last month, borrowers must have enough income to afford the monthly payments. And the rate is only good on homes that will be used as the borrowers’ primary residence. Borrowers also will have to pay for mortgage insurance.
Freddie Mac’s version of the loan program also requires that borrowers earn less than the median income.
FHA, Fannie Mae and Freddie Mac have their own definition of a qualified borrower, but banks often go beyond these standards, raising the threshold for what it takes to qualify for a home loan.
Banks do this to shield themselves from the possibility that they might have to buy back loans they sell to the government should the loan go unpaid. That can happen if the government determines that the lender failed to vet borrowers’ creditworthiness properly.
“It could be something like a missing piece of documentation in the loan file that wouldn’t necessarily cause the loan to default,” said Tom Wind, executive vice president of home lending at EverBank.
However, the government has taken steps in recent months to clarify for banks the type of scenarios that would trigger a loan buyback in the future. That could motivate some banks to remove the additional credit standards imposed on government-backed mortgages.
The low down-payment programs offered by government-backed loans help borrowers buy a home for less money upfront, but they can cost more over time, particularly when one factors in the cost of private mortgage insurance. While private mortgage insurance is tax-deductible, consider paying more each month to help build equity in the home up to 20 percent. At that point, the borrower can apply to have the private mortgage insurance waived.
Generally, it’s less expensive to get a conventional loan guaranteed by Fannie Mae or Freddie Mac because FHA charges higher premiums, even after the recent reduction. In addition, the interest rates are lower for conventional loans.
Fannie Mae also has a lower down payment requirement than FHA.
“The single best thing first-time homebuyers can do to improve their chances to qualify is to bring more money to the table for the down payment,” said Sam Khater, deputy chief economist at CoreLogic, a real estate data firm. “Homeownership is about building equity, so anything that buyers can do to get a good start on building equity will help them achieve sustainable homeownership.”