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By G. Steven Bray
In an effort to encourage homeownership for lower-income consumers, Fannie Mae has expanded its HomeReady loan program. The program allows as little as 3% down payment and sweetens the interest rate for those who qualify.
The program has income limits in most areas, and until recently the limit was 80% of median income in many areas. Fannie raised the limit to 100% of an area’s median income, and in special low-income census tracts, the program has no income limit.
Fannie also changed the program to allow borrowers to own another home. This may be appealing for those who currently own a home and don’t want to wait for it to sell before closing on their new home.
The program is attractive for a couple reasons:
– First, the program allows for a higher debt ratio, up to 50% of a borrower’s income. In addition, the income of a roommate or significant other can be considered for qualifying even if that person is not on the loan.
– Second, Fannie absorbs some of the risk premium usually associated with low down payment loans. Fannie requires a lower mortgage insurance rate and allows a lower interest rate than is usually associated with these loans.
HomeReady borrowers are required to complete a homebuyer education course, and one naturally wonders whether that compensates for the lower risk premium assigned by Fannie. Time will tell whether the default rate on these loans justifies the favorable treatment.