Serving Creditworthy Borrowers in Today's Market
When we think about helping more people achieve homeownership, the focus typically is on how to support first-time buyers. But in today's market, a new pattern has emerged: Many existing homeowners are struggling to become repeat buyers, confounding the traditional "starter home to move up" model.
Fannie Mae’s analysis shows a 40 percent decrease in repeat buyers from 2002 to 2014. It is striking that even among homeowners with mid-tier credit scores (approximately 680–740), repeat home purchases dropped dramatically. Owners of their first homes may have the credit eligibility to move up, but low housing equity appears to be holding them back.
Fannie Mae Solutions
Fannie Mae offers solutions that help our lender partners serve creditworthy homeowners with mortgages who are “locked in” to their current homes by low equity. Two possible options are to renovate rather than move, or convert the home to a rental property and purchase a new residence.
Our HomeStyle® Renovation product can finance updates such as a kitchen renovation, addition of a bedroom to accommodate a growing family or relatives requiring care, or modifications to accommodate aging in place, without the transaction costs of selling a current residence and purchasing a new one.
Rental conversion may be a good choice for some owners. Earlier this year, Fannie Mae updated our Selling Guide policy to make it easier for borrowers to finance a new home while converting their previous home to a rental property.
Other Fannie Mae policies expand home purchase opportunities for both first-time and repeat creditworthy borrowers in today’s market.
Our recently introduced HomeReady™ product is designed for today’s market. It helps lenders serve creditworthy low- to moderate-income borrowers, with expanded eligibility for financing homes in designated low-income, minority, and disaster-impacted communities. Features include low down payment financing – up to 97 percent for purchase of a one-unit property, and up to 95 percent for a limited cash-out refinance. Other features for both purchase and refinance are a lower-than-standard level of mortgage insurance coverage (for loan-to-value [LTV] ratios higher than 90 percent), and several income flexibilities.
An innovative new feature, unique to HomeReady, supports extended-family households by considering income from a non-borrower household member – including a non-relative – as a compensating factor in Desktop Underwriter® (DU®) to allow for a debt-to-income (DTI) ratio higher than 45 percent, up to 50 percent. HomeReady also permits consideration of rental income from an accessory dwelling unit, such as a basement apartment, and from boarders. To help support affordability, standard risk-based pricing is waived on any HomeReady loan with an LTV ratio above 80 percent and a credit score of 680 or higher (a risk-based loan-level price adjustment cap of 1.50 percent applies for loans outside of these parameters).
High-cost areas, such as many parts of California and the northeastern United States, not only are tough markets for first-time home buyers, but also are among those showing the biggest drops in repeat buyers since 2002. To better serve creditworthy borrowers in high-cost areas, Fannie Mae recently updated our policy for high-balance loans (loans with original loan amounts meeting the high-cost area loan limits established by the Federal Housing Finance Agency). We increased the maximum LTV ratios, aligning them with our standard eligibility up to 95 percent, and we removed many policy overlays that applied only to high-balance loans.
Finally, home buyers who can get financial support from others who will not occupy the property can benefit from the recent expansion of our policy for non-occupant borrowers. For loans underwritten through DU, non-occupant borrowers’ income and liabilities will be considered in qualifying for financing 1- to 4-unit owner-occupied properties without a separate calculation of DTI ratio for the occupying borrower.
Fannie Mae’s Commitment
Fannie Mae remains committed to a safe, responsible balance between expanded access to mortgage financing and the long-term viability of today’s mortgage loans – limiting risk to lenders, investors, homeowners, and taxpayers. We continue to work with lenders to make mortgages more accessible, affordable, and sustainable for first-time and repeat home buyers.
Single-Family Credit Policy and Risk Management
December 3, 2015