Fannie and Freddie Need A No Down Payment Mortgage

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.

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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.

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4 Comments

Filed under Opinion

4 responses to “Fannie and Freddie Need A No Down Payment Mortgage

  1. Hey – those no income no doc loans were awesome!!

    See you soon Philip.

    GO HOOS

  2. Kelly Ceppa

    I don’t agree that it’s a good idea to let those with “no money down” buy a house. Perhaps there are those who would be good homeowners who don’t yet have a downpayment saved but what happens when the roof leaks or the HVAC breaks down and you have no savings? You can’t be a good steward of your property if you have no ability to take care of it– and sometimes those needs are immediate. You need to know these buyers will know how to manage their income and to anticipate expenses and be prepared for the unknown ones, not just the regular bills. Perhaps what would make more sense is to have a requirement–perhaps for all loans–that the buyer has x number of months of expected expenses in savings left AFTER paying closing costs, down payment, etc. And, perhaps a borrower education program could be an acceptable alternate to some portion of a down payment (a 1% reduction?) but I still think that the borrower needs to have some skin in the game– some reason NOT to just walk away if/when finances get strained. This would set them up to succeed as homeowners and not get them in a position where they are ready to trip and fail. I think we need to look out for the best interest of our clients, not just what increases our business for the short term.

    • Kelly, good points. I believe we have similar opinions. I’m not for zero down unless the borrowers are very strong credit wise, ratio wise, and have reserves. This would only be for those borrowers. I also agree with you that any zero down would have to have a home buyer counseling class. I’m not at all for going back to the zero down marginal credit loans. That type of lending is just irresponsible.

      Philip

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