June is National Homeownership Month, a time to celebrate the benefits that homeownership brings to families, neighborhoods, and communities across America. It’s also an opportune time for you to educate prospective borrowers on the value of homeownership. In this 4-part series, we’ll discuss the housing market, the benefits of homeownership, the challenges first-time homebuyers face, and how different mortgage structures can help your borrowers.
As we celebrate National Homeownership Month, we should stop to consider how we can make homeownership accessible for more people, not just those who can make large down payments and have excellent credit.
Market forces are at work that are making housing less affordable for many Americans including low housing inventory, rising home prices, and stagnant wages. We covered these market forces in the first installment of this blog series if you need a refresher.
While we can’t control market inventory, we can play our part by tapping into affordable housing loans that are geared towards low-to-moderate income borrowers. We can also educate borrowers on all their options for affordable housing loans.
What Affordable Housing Loans Are Out There, And Do We Use Them Enough?
Of course, there are already several government-sponsored affordable housing loans that offer low down payment programs to buyers in high-cost or underserved communities to buy homes. To name a few, there are programs available through community development financial institutions (CDFIs), Fannie Mae’s HomeReady®, Freddie Mac’s Home Possible®, the FHA, and state and local Housing Financing Agencies.
Having a basic understanding of the benefits and drawbacks of each program can help you find a mortgage that is right for your borrower. Let’s take a look at some of these program particulars in greater detail.
FHA Mortgage Insurance Never Cancels
Some loan officers don’t realize that an FHA loan’s mortgage insurance never cancels if you keep the FHA loan (you can remove it if you refinance to a conventional loan with over 20% equity). FHA loans DO have mortgage insurance, it’s just not through a conventional mortgage insurer like Genworth.
By using conventional MI paired with HomeReady, Home Possible, and loans with state HFAs, borrowers may be able to cancel MI once their home equity reaches 20%. Ultimately, some borrowers may pay more over time with an FHA loan than with a conventional loan with MI. Here’s an example:
|97% LTV, $200,000 Loan, 25% Coverage, 740 Credit Score, 2 Borrowers||FHA||HomeReady with Genworth MI|
|Upfront MI Premium||$3,500||$0|
|Monthly MI Payment||$141.67||$81.66|
|Monthly MI + P&I Payment||$1,142.76||$1,124.95|
|5 Years of MI Payments||$11,500||$4,900|
|Estimated Time to MI Cancellation||Never||120 or Less|
As you can see, over a period of just 5 years, a borrower will pay $7,500 more in FHA MI payments than if they had gone with a conventional loan with MI.
Subtle Differences Between HomeReady and Home Possible
When you first learn about HomeReady and Home Possible Advantage®, there can be some confusion around the differences between the two programs. After all, they’re both programs designed to cater to low-to-medium income individuals.
In some cases, there can also be confusion around the fact that these programs are not meant exclusively for first-time homebuyers. That misconception likely comes from the fact that both programs have some level of requirement for homebuyer education if any of the borrowers are buying a house for the first time.
No matter what type of borrower you have (first-time or repeat), all will benefit from both programs’ allowance of 100% gift funds, lower MI coverage, and waived LLPA and delivery fees for credit scores over 680.
So, what’s the difference between these two? Here are some differences worth noting:
|Based on 97% LTV||HomeReady||Home Possible Advantage|
|Homebuyer Education||Required for at least 1 borrower||Required if ALL borrowers are first-time buyers|
|Underwriting Method||Desktop Underwriter®||Loan Product Advisor® or Manual UW|
|Loan Amount||Base Conforming; High Balance Ineligible||Base Conforming; Super Conforming Ineligible|
There are many more nuances to each of these affordable housing loans. You can find them laid out in our Affordability Options training course.
HFAs Help Local Communities
While the FHA and GSE programs are highly accessible, they don’t always do the best job of catering to underserved areas. HFAs exist to meet the affordable housing needs of the residents of each city and state which means they focus on underdeveloped and underserved areas on a granular level.
When it comes to getting a loan through the HFA, some of the benefits include low-cost financing options, financing for under-developed areas, lower MI coverage, and down payment assistance programs.
Find more information about your state’s HFA through the NCSHA.
We only just skimmed the surface with many of these programs. However, knowing the basic differences and key advantages of these programs can help you better guide your borrowers to a loan that best suits them.
When you’re more knowledgeable on all your borrowers’ options, they’ll feel more confident in you and help you build better relationships.