- Don't discount self-employed borrowers right away when they tell you their income and tax filing status.
- Lower credit borrowers now have access to loan products with lower interest rate options to help them qualify.
- There is no longer the requirement for homebuyers to contribute to their down payment, closing costs or settlement costs -- all can come from a gift.
Homeownership has been on the decline in the U.S. for more than a decade. We’re not just seeing an overall decline from 2004 through 2015, but the actual homeownership rate has shrunk every year during that span — starting at 69.2 percent and dropping to 63.8 percent last year (from the U.S. Census Bureau).
Although the subprime mortgage crisis occurred in the middle of that span, it certainly hasn’t helped to make things easier for potential buyers. Banks are more cautious with lending, and a wave of former owners suffered foreclosures during the crisis, which limits their ability to gain access to new loans.
Updates to Fannie Mae, including its new HomeReady program, aim to make mortgages accessible for those who would otherwise raise red flags with lenders.
While a lender might otherwise look warily at self-employed borrowers, buyers with lower than optimal credit and individuals with low cash pools, Fannie Mae now offers options that will make mortgages feasible thanks to lower interest rates and no limits on cash gifts toward down payments and closing costs.
Here are five Fannie Mae developments for lenders to consider when working with clients who might not qualify for a conventional FHA loan.
1. Unlimited gift contributions
Buyers can now use unlimited gift contributions toward down payments and closing costs, which agents can emphasize to ease the minds of nervous buyers. Previously, the gift amount that could be used toward down payments and closing costs were limited, and the borrower was required to make a minimum contribution.
Now, there’s no limit regarding how much of a buyer’s down payment is supplied by non-borrowers. Furthermore, gifts can now be used not only on closing costs but also for building reserves. If a borrower can pay off a down payment on his or her own dime but need help meeting the reserves limit, they can now inject funds from qualified donors.
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You can ease a potential homebuyer’s nerves by emphasizing the flexibility that the guidelines allow. Buyers can use any amount of gifts from qualified relatives to put toward purchasing home, or they can use those gifts for meeting required reserves.
These options allow borrowers to worry less about their ability to own a home, both the short-term and long-term. If your clients seem anxious about how much they’ll be required to either put down or hold in reserves to qualify for a mortgage, let them know about the gift guidelines. If they can come up with a potential contributor, they’ll feel better about pursuing the property.
Ahead of the curve tip: Every major city has events that cater to startup companies and aspiring entrepreneurs. Maybe you fit into one of these categories, or maybe you want to rub off on this demographic.
Either way, make yourself available at events and establish yourself as an expert on these guidelines. You can make great business connections and maybe even attract one of those young businesspeople to turn to you when looking for their first home.
2. Lower interest rates for lower credit scores
Agents can inform homebuyers of new interest rate caps set for a credit challenged borrower to give them the added confidence that they can afford a home.
Those with low credit scores who might otherwise face higher interest rates now have relief, and agents can encourage anxious buyers to opt into a new property thanks to these low rates.
The inherent difficulty with credit and homebuying is that those with “excellent” scores are rewarded in the form of lower interest rates, while those with lower scores must pay higher interest, only compounding their problems.
One of HomeReady’s biggest goals is to eliminate the hurdles for potential buyers with only “fair” FICO scores. It does so by setting caps on certain loan level pricing adjustments including those associated with credit score and loan-to-value (LTV).
The result is a lower mortgage rate than typical for those considered to be “higher risk” borrowers and, perhaps more importantly, an improved likelihood that the borrower stays current on the loan.
If you get a new client with fair credit who might face higher interest rates accordingly, suggest potential eligibility into a HomeReady mortgage.
Explain the caps on interest rates and how it allows the client to borrow at a much lower rate than their credit score would typically allow. This tip can boost buyers’ confidence when considering what they can afford.
If potential buyers are still nervous, highlight the Framework program, a mandatory online education course that teaches responsible home ownership and money management.
Ahead of the curve tip: Host a free webinar to attract potential homebuyers. As you know, there are many elements to seeking out a mortgage, most of which are confusing for the first-time homebuyer.
Advertise yourself through an online session during which you expound on these issues. If you require an email address to attend, you’ll gain access to prospects who you know are in the market, and you’ll encourage them to choose you when looking for that home because you’ve established your expertise.
3. Self-employed income documentation
The rules affecting self-employment have shifted to make eligibility less difficult and require only one year of individual income tax returns for less risky business owners. Agents should highlight the new flexibility available to entrepreneurs and small business owners.
Self-employed borrowers are many times only required to submit a tax return for the most recent year while previous incarnations of Fannie Mae required at least two.
This update makes mortgage eligibility much easier for small business owners, and agents should make the connection between the client’s career and their access to these mortgages.
Many borrowers are turned away immediately when agents realize they have only filed taxes on their business for one year. This is a mistake!
As long as the corporation has been active for two years, there is a strong chance a good borrower will only need the previous year’s return.
Another important subject to be aware of is one-time business expense write-offs. These expenses may drastically reduce the business income of a borrower, but many times can be excluded when calculating income.
When someone tells you his or her business made $35,000, and he or she is looking for a $300,000 home, don’t discount them right away. Ask how their taxes were prepared, and this might help you save a deal you would never have moved forward with.
Ahead of the curve tip: Develop a target audience based on information that is public record (like marketing to prospects who are self-employed).
Many are frustrated with the loan process when trying to purchase a home but simply haven’t been vetted properly. You can count on a good response from an ad campaign that is directed at this pain point.
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4. High balance requirements
Potential homebuyers in high-cost areas have new options to help combat high loan-to-value (LTV) ratios. Agents can use this both to help new homebuyers and encourage repeat buyers.
You can highlight the new benefits to encourage buyers in high-cost areas. Overlays that previously prohibited the use of gift contributions or created strict debt-to-income ratios have been limited so that LTV ratios as high as 97 percent now meet standard eligibility.
This makes qualifying less of a stretch for borrowers. The LTV guidelines can also be used to repeat buyers back on the market, especially in high-cost areas. Encourage your prospects to keep an eye on the market, rather than fear a high-balance loan.
Ahead of the curve tip: Don’t just tell clients the new options; ask potential homebuyers what’s keeping them from buying a house, and use their answer to determine if you can use the guidelines to help them afford their dreams. Many borrowers are amazed when they find out they only need 3 percent down to purchase a home.
5. Non-occupant borrowers
Non-occupants who plan on joining in a mortgage without moving into the property can have their income and liabilities considered when applying for financing on one-unit to four-unit properties (granted the owner resides on the property).
The borrower occupying the property will not need to undergo a separate debt-to-income ratio calculation aside from that involving the income of the non-occupant.
This change obviously offers a chance to boost buyer confidence by pointing out the options of non-occupant possibilities. However, it also opens opportunities to interest more entrepreneurial buyers.
The ability to use the income of renters toward debt-to-income ratios opens doors for those looking to rent out units in buildings of up to four units.
Ahead of the curve tip: Don’t be afraid to flaunt your accomplishments. If you’ve been successful with using the latest mortgage guidelines to help clients into homes, make a note on your website highlighting it.
Your success will be infectious for visitors considering seeking a mortgage through the latest programs. Fannie Mae was founded during 1938 as a method to get more Americans into homes, and the purpose remains the same.
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The U.S. homeownership rate has stagnated for more than a decade, from 2004 to 2015, and the new updates to Fannie Mae might be the factor that finally pushes that rate back upward.
The next time you do business with someone with less-than-perfect credit, little cash to apply to closing costs or who is recently self-employed — take Fannie Mae into consideration and help them into a home.
Adam Stephens is a branch partner at The Stephens Brotsky Group at Primary Residential Mortgage Inc. Connect with him on LinkedIn or Facebook.
