The Best Mortgage Loan You've Never Heard Of

Back in the early 2000's it seemed like the mortgage industry was coming out with new loan types all the time.  No Income Loans.  No Asset Loans.  No Income AND No Asset Loans.  If You Have A Pulse You Can Buy A House Loans (OK, maybe not that one).  It was nuts.

Somewhere around 2007, though, things changed.  We found ourselves in a recession and those crazy flexible loan types were given much of the blame.  The mortgage industry clamped down, taking away a lot of the fluff and leaving us with the tried-and-true mortgage products of yore (5% Down Conventional, FHA, USDA and VA).

In the past year or two, though, we've begun to see a thawing.  Underwriting requirements have loosened a bit.  PMI companies have lowered their rates and requirements. The best thing in my opinion, however, has been the addition of some new lower down payment options for conventional buyers.

Let's go over what's out there today...

Fannie 97

 The first to show back up on the scene in early 2015 was Fannie Mae's Fannie 97.  The Fannie 97 is a conventional loan that only requires a 3% down payment.  

The advantage of a conventional loan over a FHA loan is that the private mortgage insurance (PMI) eventually stops being charged in the payment.  The upfront fees are lower with conventional financing too (no 1.75% financed mortgage insurance like with FHA).  The property requirements also aren't as strict as with FHA, which is VERY appreciated here in Indiana where exterior peeling paint is pretty common due to our extreme seasons.

Fannie 97 does require the buyer to be a first time buyer.  A first time buyer is viewed as someone who hasn't owned a home in over 3 years.  Other than that, though, there are minimal extra requirements. Thankfully, there is no maximum income cap that you must be under to qualify unlike the other programs discussed below.

The downside of Fannie 97 is twofold.  First, the PMI companies charge more for their monthly coverage because the down payment is lower.  This makes the monthly payment higher for the buyer.

The second disadvantage of the Fannie 97 is that, like with most conventional loans, the interest rate goes up as your credit score goes down.  FHA loans don't see as much of a rate increase with 'less than perfect' scores, but conventional loans often see a rate increase at every 20 point increment when the score slides below 740.

Home Possible Advantage

Not to be left out of the game, Freddie Mac jumped in later in 2015 with their Home Possible Advantage loan.  Home Possible is also a 3% down loan and it's not only for first time home buyers.  There is a maximum income limit for the buyer, though (100% of the area median income).  In St. Joseph County, Indiana, that median income is currently $57,300.

One nice thing is that Freddie only counts the income of the borrower, not of everybody in the household. Many special programs are based on 'household income' regardless of who is on the loan. Not with Home Possible though.  If there is a two person household and together they make above that $57,300 but one or the other makes under $57,300 and can qualify for the loan on that income only, they could likely use this program.

Another REALLY nice thing about Home Possible is that the PMI rates are much cheaper than with the Fannie 97.  As of right now, the savings with the cheaper Home Possible PMI is equal to about 0.5% in interest rate (NICE!).

Hellooooooo HomeReady

Not to be outdone by Freddie Mac, Fannie Mae recently threw a second hat in the ring.  This winter we've seen the addition of Fannie's Home Ready Mortgage.

Like the two above, this is a 3% down program.  You do not need to be a first time buyer.  You do (maybe) need to earn below a 'maximum allowed' income limit.

Why 'maybe'?  Well, with HomeReady, the income limit is by census track - not by county. Many census tracks in our county have no income limit under this program at all.  Some have that $57,300 and some have $45,840 (current limits - subject to change).  Again, though, they only count the borrower's income, not the whole household income.

HomeReady brings a middle ground on the PMI rates.  It's not as cheap as Home Possible but it's cheaper than Fannie 97.  What potentially makes HomeReady REALLY attractive though is that it doesn't do that whole 'higher interest rate for lower credit scores' thing that the other two 3% down programs do.  With HomeReady, the interest rates are the same when your score is 680 or higher (NICE!).

SHOW ME IN PICTURES PLEASE!

Whew!  After all those words and pros and cons, I bet your mind is just BEGGING for a picture :). While it's still kind of number-nerdy, this graph does what words can't do easily - it compares the effective cost on all three options as of today.  By 'Effective Cost' I'm meaning the interest rate plus the annual PMI charge.  This is then broken down by credit score to see which is better at each point.

Well, here's one.

So...which is better?  As of today's interest rates and PMI pricing, the HomeReady option is beating the other two options if the credit score is 680-720.  At that point, Freddie's Home Possible gets a slight advantage.

For the borrower who wouldn't qualify for HomeReady (maybe buying in one of the lower max income areas and they make too much), Freddie's Home Possible is a decent option even at the lower credit scores.  If the buyer's income is just too high for either of those but they are a first time buyer, there is always Freddie 97 available.

So does this have you more confused than when you started?  It very well might with all the facts and figures.  Don't worry though - that's why I'm here!  The important thing to know is there ARE 3% down conventional options out there.  Just give me a call or drop me an e-mail (574-234-5201/lori.hiscock@ruoff.com) and I will gladly help you figure out which one is the best fit for you.

To learn more about the products covered here or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182