As I’m writing this, I am absolutely certain that there are lenders out there considering many different strategies for growing and maintaining their 2017 books of business. As a matter of fact, I recently had a discussion with a lender regarding affordable lending products. This lender was looking to use these programs to expand its ability to offer low-down-payment home purchase options for first-time homebuyers. Just to be clear: We’re talking about Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs, and the opportunities to engage with state and local housing finance agencies.
Features like 97% financing and Down Payment Assistance (DPA) make these programs an obvious go-to when you’re serving first-time homebuyers. But have you ever considered using these exact same programs with move-up buyers? Fannie and Freddie don’t mind. In fact, they will allow any LTV up to 97% to be considered for their affordable lending programs.
Why Use Affordable Lending Products?
So why should you consider using an agency affordable lending product with a move-up buyer? Here are a few thoughts to ponder:
1. The potential to reduce or eliminate Loan Level Pricing Adjustments. If you’re one of those folks who is still wondering “Why?” about LLPAs, well…
2. Reduced mortgage insurance coverage requirements. If you’re doing a 95% or 97% LTV loan, you’ll be using 25% coverage rather than 30% or 35% (and if you’re connected to a housing finance agency, it’s 18% coverage on a 97% LTV)
3. Both Fannie and Freddie waive borrower income limits in certain census tracts. Freddie simply uses the “Underserved” moniker for determining where it will waive income limits, while Fannie gets a little more granular in its assessment
You’ll find that homebuyer education is also an important component of both programs. Fannie Mae requires homebuyer education through our friends at Framework for at least one borrower on every HomeReady loan. Freddie Mac requires homebuyer education for at least one borrower if neither borrower has had an ownership interest in a property in the last three years (read: first-time homebuyers). Remember though, if you have a move-up buyer, Freddie Mac doesn’t require homebuyer education.
So, I know what you’re thinking. “Craig, many move-up buyers are looking to move out of underserved markets when they decide to buy.” Balderdash!!!!! That’s not true at all.
Many underserved markets in our country are targeted with new construction and are beautiful areas to buy your first home, or move-up to your second home and raise a family. It’s unfortunate, but the word “underserved” carries a negative connotation with many people. Let’s face it, it’s not a really great word anyway. But don’t let the name fool you — these are great markets. And if you’re a lender who is concerned about community reinvestment act credits or supporting the communities you serve (and I know you are), these markets are extremely important.
Don’t believe me? Let’s take a quick look at Harris County, Texas (that’s Houston for us non-Texans). Check out these areas in Harris County where the agencies allow standard borrower income limits to be waived (you’re welcome, Houston).
Freddie Mac – Home Possible
Fannie Mae – HomeReady
Here’s a little more food for thought. If you think that an FHA-insured loan is the best execution for your borrower, you may want to reconsider:
*Interested in what this looks like for a move-up buyer at 95%? Visit our Quick Compare Calculator.
“But Craig, with the FHA loan my borrower will save $43 per month!” Yes, I get it, but I also believe that’s applying short-term thinking to a long-term commitment. Mortgage prepayment rates have been lengthening because of the interest rate environment. And thanks to our friends in Great Britain (read: Brexit), it’s likely that we’ll continue to see interest rates at all-time lows. So, it’s safe to say that your borrower will have his or her home loan for between 8 and 10 years.
Let’s take a closer look…
After five years, your borrower will have spent an additional $1,612 (that’s $27 per month) for a conventional loan. How did I get there? We saved your borrower $1,000 in down payment and another $1,000 in home equity. He or she spent $3,612 more over the course of the past five years ($3,612 – $2,000 = $1,612). And if we start talking time-value of money, it’s even lower (no, I won’t take you through that exercise).
Now here’s when it gets interesting…
In year six and after that (assuming 2% home appreciation), your borrower will no longer be paying for a private mortgage insurance premium. That’s an immediate savings of $82 per month in year six. Over the course of the next three years, that’s a savings of nearly $2,820, and a “go-forward” payment of $898.
If I asked you to invest $27 per month for five years, and in turn, after that five years, I would pay you $78 per month for the next three to five years, would you accept the offer? I think we all know the answer there.
Now I know it’s simpler to just sell that initial payment (after all, who doesn’t appreciate a little instant gratification?), but we all know that the very best loan officers in the business differentiate themselves by showing their borrowers that they have their best interests at heart. Having a discussion with your borrowers about the long-term benefits of a Fannie Mae or Freddie Mac affordable mortgage product, backed by MGIC MI, will add something to your arsenal that others may not think about: the ability to offer alternatives with positive, long-term consequences for your borrowers.
You may be saying right now, “Craig you’re playing with the numbers.” I would submit that the numbers speak for themselves, and if you just lost a loan where the only alternative you provided was FHA, your competitors may have been “playing with the numbers” as well.
If you’re thinking that the Brexit environment is providing you with some excellent refinance opportunities with your customers, I would also like to mention that underserved markets are a great place to look for some incredible opportunities to leverage the refinance side of HomeReady and Home Possible. Both Fannie Mae and Freddie Mac will allow rate-term refinancing up to 95% LTV.
If you’d like to find out how we are helping our partners think differently about affordable lending programs and underserved markets, you needn’t look any further than your MGIC Account Manager.
Tools for Getting Started with Underserved Markets
MGIC provides clear, fair, transparent rates on a variety of premium plans without charging more based on market, DTI or number of borrowers. More >>
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(Find the census tract of your subject property)
The FFIEC Geocoding/Mapping System (System) helps financial institutions meet their legal requirement to report information on mortgage, business, and farm loan applications. More >>
(Eligible census tracts)
This service is provided for the sole purpose of showing potential eligibility for HomeReady loans, and not for any other purpose; and is subject to change. Lenders must determine borrower/loan eligibility in accordance with Selling Guide policy. More >>
(Eligible census tracts)
Underserved Areas are determined at the census tract level. Census tracts generally comprise smaller areas than counties. More >>