The FHA recently made a big splash by announcing a reduction in some of its mortgage insurance premiums, but there are alternatives that could make the barrier to home ownership even lower for first time home buyers with moderate or low incomes. They are called community mortgages.
Fannie Mae's MyCommunityMortgage program and Freddie Mac Home Possible program allow qualifying buyers to obtain a mortgage with as little as three percent down. On top of that, these programs have other advantages which can make them less expensive than an FHA mortgage, both initially and over the life of the loan.
Who Are Fannie and Freddie Anyway?
Unlike the FHA, Fannie Mae and Freddie Mac are not government agencies, but they're not completely private, either. They are called "government-sponsored enterprises" or GSEs, and they buy loans from lenders to make mortgage financing more available to home buyers. The loans they buy must meet guidelines set by the US Federal Housing Finance Agency (which is a government entity).
While FHA mortgages are insured by the federal government (premiums are paid by FHA borrowers), MyCommunityMortgage and Home Possible loans are backed by private mortgage insurance (PMI).
Who Is Eligible for Community Mortgages?
There are some limitations to these programs. Here are the basic eligibility requirements:
- The property must be a primary residence, not a second home or rental.
- Borrower must meet HUD's definition of a first-time buyer, which means not having had ownership interest in a home within the last three years.
- The loan amount must not exceed the GSEs loan limits. In most cases, that's $417,000. Higher limits apply in higher cost areas. You can find Fannie Mae and Freddie Mac loan limits online.
- Borrower must complete an approved homebuyer education program.
- Borrower income cannot exceed guidelines set by the GSEs. Most of the time, that's 100 to 120 percent of the median income for the area, but it goes as high as 170 percent for higher cost areas. You can look up the income limits online, or just contact an approved Fannie Mae and Freddie Mac lender. They may be able to help you along a course towards home ownership that is much more affordable than you ever imagined.
What Are the Advantages of Fannie and Freddie's New Programs?
The MyCommunityMortgage and Home Possible programs offer a number of advantages. The following are some of the key selling points:
- The down payment requirement is just three percent. That's lower than the 3.5 percent required by the FHA, and the five percent required by most conventional (non-government) programs.
- You don't need perfect credit. People with credit ratings as low as 660 can qualify, and exceptions may be made under special circumstances.
- Mortgage insurance premiums usually cost less. Even though the FHA just lowered its mortgage insurance premiums, for a 30-year loan with less than five percent down, the annual premium is .85 percent (and more for loans above $625,000). In contrast, 30-year loans with less than three percent down through the MyCommunityMortgage and Home Possible programs have annual premiums ranging between .57 and .90 percent, depending on your credit rating. So, the Fannie Mae and Freddie Mac annual premiums are cheaper than FHA premiums in most cases.
- Mortgage insurance eventually goes away. Unlike FHA, which charges an annual mortgage insurance premium for the entire life of the loan, community mortgages automatically cancel private mortgage insurance when the loan balance reaches 78 percent of the original home value.
- Fannie Mae and Freddie Mac require no upfront mortgage insurance premium. In addition to annual mortgage insurance, FHA loans require an upfront premium of 1.75 percent, which increases the cost of initiating the loan.
- You can get help with the down payment. Borrowers are often required to use their own savings for down payments, in order to demonstrate their commitment to the home buying process. However, the MyCommunityMortgage and Home Possible programs recognize that this can be an insurmountable barrier to borrowers with limited means. So, they allow the down payment to come from gifts, community grants, and even approved forms of secondary financing. FHA, VA and USDA loans also offer this benefit.
Check Out Community Mortgages While Rates Are Low
These programs are all about lowering barriers for first time home buyers. This includes reducing initial and ongoing costs, easing down payment requirements, and making loans available to people of modest financial means. LendingTree partners offer community mortgages right now. Complete a short request form for custom quotes, or check out LoanExplorer by LendingTree for program rates and costs from competing lenders.