Last week I shared that this was coming but that no announcement had been made. Well here it is, officially announced on Monday, 12/08/2014 and effectively online over the weekend of 12/13/2014; Fannie Mae will offer 97% LTV financing to help home buyers who would otherwise qualify for a mortgage but may not have the resources for a larger down payment.
I read the FannieMae press release and the official Selling Guide Announcement SEL-2014-15 to see if either was signed by Santa Claus, but they were not. First time homebuyers can now in fact put as little as 3% down and get conventional financing (no longer confined to the FHA only box). There are no prohibitive restrictions; in fact if two people are buying a home, only one of them need be a first time buyer. Standard FannieMae underwriting guidelines and standard PMI coverage and costs apply. This is a significant mortgage financing event and should bring more first time buyers into the active home buyers’ pool.
I would expect to see mortgage and real estate people waiving the 3% down payment banner in all of the parades and in all of the advertising media in the months to come. Up until now, the limited-down-payment-first-time-home-buyer market was sorely underserved primarily with HUD insured FHA financing as the primary option. As FHA mortgage insurance (MIP) costs have risen to dizzying heights in the last few years, consumers in this market segment stepped back to assemble more down payment and qualifying virtues to secure conventional financing. Expensive FHA upfront and monthly mortgage insurance made the economics of low down payment mortgage financing prohibitive.
Enter 3% down payment conventional mortgage financing and the landscape changes dramatically. Conventional financing does not handcuff borrowers to mortgage insurance forever like FHA MIP does. Once equity targets (20% – 22%) are reached, current appraisal supported value can eliminate conventional PMI (Private Mortgage Insurance). Not so with that FHA MIP, once you get it, the only way to get rid of it is to refinance out of the FHA loan or sell the house!
And let us not forget about that upfront FHA MIP insurance which is 1.75% of the loan amount added to the loan. So a $200,000 FHA loan would actually start at $203,500 ($3,500 for the upfront MIP). I did not make that up, go look it up for yourself!
By the way, conventional PMI (Private Mortgage Insurance) has no upfront PMI, never has.
If you were a first time homebuyer with a limited amount of money for a down payment, which would you choose?
I gotta’ think that the justification model for that ever increasing FHA MIP is getting a hard second look over at HUD. Or at least I certainly hope that it is, otherwise these new FannieMae enhancements will further erode already reduced FHA loan volume. With the MMI (Mutual Mortgage Insurance) Fund already running an unsustainable deficit, reduced FHA volume and the reduction in the attendant MIP will visit the kind of financial crisis upon HUD that may necessitate a dreaded bailout.
Historically, Commissioner Galante and her team respond with increasing FHA MIP to solve the MMI Fund deficit management issue. Not sure if that will help this time because all of those potential MIP contributors will be over at FannieMae making payments on their 3% down conventional loans.
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