New / Old Loan Practices Assist First-Time Home Buyers

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It’s hard to remember a time when you and your personal banker would sit down with you over a meal and hash out the terms of your loan.  You’re a hard worker, you have a savings account, and some collateral in your land and equipment.  Your banker knows who you are and your circumstances, and by the end of your meal, you all shake hands and head back to the office to sign the paperwork…on a new mortgage.  The reason it might be hard to remember this era is that the mortgage industry hasn’t worked that way since before Fannie Mae and Freddie Mac were established by the United States government to provide an “easy” way for low-income families to qualify for a mortgage.

Many people don’t realize that these two companies were both created and then privatized in order to separate the government’s role in issuing mortgages as well as becoming a monopoly on low income lending.  Originally, Fannie Mae was a government created mortgage company launched right after the Great Depression by President Roosevelt and Congress.  The company was conceived to buy mortgages from lenders offering low-income Americans a chance to buy a home using a government-backed loan.  The company was de-regulated in 1968 when it became a public corporation, and the government even opened a new company called Freddie Mac to “compete” with Fannie Mae, so that the company wouldn’t become a monopoly.  Freddie Mac also was separated from the federal government to become a public corporation in 1989.  The names Fannie Mae and Freddie Mac are actually based on the departments of the federal government which were in charge of their structure and development – Federal National Mortgage Association (Fannie) and the Federal Home Loan Mortgage Corporation (Freddie).  These two companies and government programs are responsible for the FHA loan which offers the 30-year, fixed-rate mortgages, which are the bedrock of the nation’s housing finance system since after the Great Depression.

Even after the real estate industry took a downward turn in the past 5 years, everything in this world is destined to come full circle which is what is now happening with, you guessed it, Fannie Mae and Freddie Mac.  After massive restructuring and new regulations – a veritable house cleaning – these two agencies are now going to back loans with a down payment as low as 3%.  While it is not the $0 down loans that revved up the mortgage industry at the beginning of 2000, these loans will make it moderately easier for first-time home buyers to be able to come up with the money to put down on their new home.  I say moderately because there are a few requirements that home buyers must meet to qualify and finally obtain the loan.

  • Credit score of at least 620
  • Private Mortgage Insurance must be purchased
  • Proof of income and assets must be thoroughly vetted
  • Must undergo homeownership counseling before closing on the loan

The difference between these new Fannie and Freddie backed loans and the FHA loan is that home buyers may cancel the PMI (Private Mortgage Insurance) once the debt on the home falls below 80% of its value.  A new appraisal can be performed and sent to the mortgage company for consideration.  These new loans will be available from Fannie Mae by December 13, 2014 and Freddie Mac will have them available by late March, 2015.

 

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