Before you start yelling at me about ‘oh no, here we go again’, hear me out on this. The biggest obstacle I see with first time home buyers and move up buyers is the money it takes for a down payment. First time home buyers are obviously cash tight and move up buyers are having the same issues because their current home has not fully recovered from the real estate recession of 2008. They are not necessarily upside down with the equity in their home but they are strapped. After paying the realtor fees and closing fees a lot of these borrowers need the option of a no down payment loan. If Fannie and Freddie would come up with a good no down payment mortgage I believe this would jump start housing and really bolster the economy and help everyone.
So many of the customers I prequalify have good jobs, good credit, but no money. After hearing that they will need at least 3% to 3.5% to buy a home they give up the process. My suggestion is that Fannie and Freddie develop a program for these borrowers. I would like to see at least a 700 credit score with no more than a 45% back ratio (monthly mortgage payments and debts divided by monthly income). I also would not have an income limit or have it restricted to just first time home buyers.
Here are the reasons this program would be different than the zero down payment loans that were available in the mid 2000’s that helped create the real estate crisis. First of all, we now have QM (Qualified Mortgage) and ATR (Ability-To-Repay). Both of these rules were put into place to make sure borrowers can afford their mortgages and both rules eliminated certain features that lead to risky loans and higher default ratios (interest-only, negative amortization, balloon features, stated income, etc). I can remember back in 2005 there were mortgages available that were zero down, stated income, interest only, with 680 credit scores. And if you could prove your income then you could get a no down payment loan with as little as a 580 credit score! Talk about a train wreck. The only thing this new loan would have in common with the loans of 2005 is the zero down. The income would be verified, ratios limits would be followed, and credit scores would have to be high.
I understand peoples trepidation and hesitancy with the zero down payment mortgages. But, if handled in the correct way, these loans would be a big boost to the housing market and overall economy without increasing the risk of another real estate crisis.