Financial institutions are beginning to ease off of their strict lending guidelines following the end of the great recession. However, many of these institutional lender's guidelines are still more stringent than most borrowers can meet. Luckily, there are loan programs provided by government entities designed to make home ownership easier. And they have recently decided to try to make it even easier than before!
Here's a little bit of boring history before the good stuff:
Historically, when a borrow can not quite sufficiently meet a bank's standard, they have been able to turn towards Fannie Mae or Freddie Mac to qualify for a mortgage. Both Fannie Mae and Freddie Mac have been sanctioned as the Government-regulated institutions that's purposes have been to stimulate home ownership by providing mortgages to a range of folks of different economic fabric. Fannie and Freddie are both regulated by HUD (The Department of Housing and Urban Development). Part of HUD's motivation as an regulatory body is to provide legislation and programs that will bolster home ownership. You will often hear that home ownership represents a healthy, national economy because it creates a trickle that drives commerce to the service and labor industries (e.g. I need a lawn mower! Call a plumber!). In order to increase home ownership, HUD provides loan options that are less difficult to achieve than many conventional loans from banks. One of these famous mortgage products from HUD is that of the FHA. The Federal Housing Administration is a part of HUD and provides mortgage loans through approved lenders that are designed to aid lower-income families and first time home buyers, which is great!
FNMA or Fannie Mae, as we usually refer, is a privately owned mortgage company that is regulated by HUD. Fannie Mae was initiated in 1938 to improve homeownership at the tail of the Great Depression. This program exceeded expectations and remained as a permanent fixture in the American economy when it became privately owned many years later. Freddie Mac provides essentially the same product as Fannie Mae. However, Freddie Mac was introduced to create competition for bank owned mortgages to be sure that their rates remained fair for the public. What many folks do not know is that Fannie and Freddie are the largest owners of mortgages in the U.S. They make up over 50% of the mortgages in the country!
Following the difficulties that the housing market has faced in the last few years, the lending industry had to tighten up their processes. After all, most of the recession is due to their lack of forethought. Finally, these lending institutions are beginning to return to competitive rates and lending more and more to qualified borrower. The FHA loan provided by Fannie and Freddie is no exception and HUD is altering some of their requirements to provide more mortgages to more people. CNN Money explains this quite well as "Low Down Payment Mortgages Make a Comeback," by Mark Fahey and is the motivation for this post.
One of the FHA loan's biggest turn-offs is that they require the borrower to pay a monthly insurance fee which is meant to protect the lender in case the borrow defaults. This is usually a fee of 1.35% of the loan amount per month and normally ceases to be required once 20% of the loan has been payed. In order to encourage more borrowers to choose FHA loans, this insurance is being reduced in 2015 from that 1.35% down to .85%! Another was in which they pan to stimulate home ownership is by reducing the required down payment of 5% to only a 3% down payment. This translates to quite a lot of money for those who qualify for an FHA. There are a couple of government-backed loan products that require 0 money down, but they are not as freely provided as FHA's. One of these products is, of course, the VA loan. The VA is a wonderful product that provides loans to veterans and their spouses with no money down. Another product that requires 0 money down is the USDA loan. A USDA (US Department of Agriculture) is designed to be a mortgage specifically to stimulate rural areas. However, most people will be surprised to learn what qualifies for rural according to these loans. These homes do not have to be in the middle of no where. Many areas very near metropolitan areas can qualify for USDA loans, with certain restrictions.
If you fear that you do not qualify for a conventional mortgage, you should really consider an FHA loan. I know many mortgage lenders that swear by them for first time homebuyers. And I love helping first time buyers find the right home for them. Please feel free to contact me if you have any questions or are in need of a Realtor®!