With rising home prices, buying a home isn’t easy especially if you’re considering moving to a metropolitan area like Los Angeles which has a median price of $569,000. However, you’re free to breathe a sigh of relief because the mortgage industry has positive changes ahead. Government-controlled mortgage giants Fannie Mae and Freddie Mac are paving the way for rolling out new programs to encourage home ownership.
Here are a few of the changes headed our way.
1. Reduced down payments: During the bubble, borrowers were often able to put nothing down by financing the entire purchase. Naturally, standards have tightened up since then. For a low-down-payment option, borrowers usually had to turn to the Federal Housing Administration, which allows 3.5% down, but requires costly mortgage insurance for the life of the loan. These days, borrowers have access to more options but generally need a good credit score. More and more lenders are adopting a 3% down loans while some are going even lower.
2. Debt-to-Income Ratio: Another recent change affects how much debt a prospective borrower is allowed to carry as a percentage of their gross income. The debt-to-income cap was 45% as established by Fannie Mae after the housing crisis. They have since raised the cap to 50%. This has allowed more borrowers to qualify for a loan, although they still must prove they are less risky with a higher credit score.
Thanks to the Dodd-Frank Act, lenders must ensure borrowers have the ability to repay their mortgages. However, these recent changes have caused some critics to raise concerns. Some call the differing tweaks at Fannie and Freddie a “slippery slope” that in the past has caused a “tit for tat” of looser standards at the two companies and the FHA. Others say that recent changes are positive but assert that caution is needed.