Even as the housing market gets back on track, the numbers of first-time buyers continue to disappoint. This is strongly associated with the tight credit requirements facing would-be buyers. Recent important government policy changes and the introduction of new low down-payment programs, however, should set the stage for increased first-time buyer activity in 2015.
Clarity on Mortgage Qualifications
Both Fannie Mae and Freddie Mac finalized mortgage qualification guidelines that went into effect on Dec. 1. These guidelines clarified murky qualification standards set in place as a result of the Dodd-Frank reforms, which were intended to prevent a repeat of the financial crisis.
Up until now, the absence of specific rules and clear guidance on what types of errors would prompt Fannie or Freddie to reject a loan, leaving the underwriting bank or lender on the hook, led to very conservative lending practices. To avoid the risk of Fannie or Freddie rejecting a mortgage months or years after it closed, banks added “overlays,” or additional requirements, to the proposed guidelines.
As a result, according to Ellie Mae, a mortgage software company, the average denied credit score on conventional purchase mortgages in October was 723 even though the minimum standard set by both Fannie and Freddie was 620.
The new standards should lead to thousands more consumers being able to get a mortgage and should also speed up the underwriting and approval process.
Measures of mortgage credit availability from the Mortgage Bankers Association already indicate a slight loosening of credit in November prior to these rules going into effect. All three measures of mortgage credit availability were also higher than November of last year, between 3% and 5%. If that trend continues, it will indeed mean that we are seeing standards revert to more normal levels.
More Attractive Low Down-Payment Mortgages
Earlier this week, Fannie Mae and Freddie Mac both announced the details of new low down-payment mortgage programs they will be offering that enable qualified buyers to purchase a home with down payments of as little as 3%.
While these programs only lower the down payment threshold by 0.5% from similar loans available from the Federal Housing Administration (FHA), they will likely be far more attractive to consumers than the FHA loans. These new programs avoid the FHA fees that effectively increase the rate charged. Another advantage over FHA is the borrower’s ability to stop paying private mortgage insurance fees once the equity of the home reaches 20%.
Fannie Mae’s offering will be the first available to qualified borrowers who have not owned a home before or within the last three years. But Fannie Mae doesn’t lend directly, so it may take some time before we see specific lender offerings—perhaps in early 2015.
Clarifying when lenders are at risk and offering low down payment programs should increase flexibility in mortgage qualification. This should pave the way for more first-time buyers in 2015. If we start to see specific competitive low down-payment lender offerings and evidence that standards are loosening, the spring selling season may start earlier than normal. After all, first-time buyers do not have to sell an existing home and can jump into the market at any time.
Jonathan Smoke is realtor.com®’s chief economist.