first time home buyer – owner loan

Christine Carter asked:


With the collapse of the Subprime mortgage market, the mortgage industry has changed dramatically in recent months. Many of the more liberal mortgage programs have been discontinued. How will this effect the market for first time home buyer loans?

From approximately the year 2000 until the year 2004 interest rates fell steadily, reaching multi-decade historic lows by late 2004. This historic drop in interest rates fueled a multi-year boom in the real estate industry. Real estate prices were escalating rapidly with each passing month, and everyone it seemed wanted to be involved in real estate.

That included lenders, who were eager to gain new customers. In the frantic race to make as much profit from real estate as possible, lenders lowered their standards and created new lending requirements that were so lenient it seemed that anyone with a pulse would qualify!

Loose lending standards, historically low interest rates, and rapidly rising real estate prices was the perfect formula to attract millions upon millions of people.

And that is exactly what happened.

However, after all of these people made real estate purchases, who would be left to make more purchases? Answer: not many people.

And thus, the real estate market began to cool. At first, it started with the rate of appreciation slowing. Prices were still rising, but not nearly as fast.

And with price rises slowing, less people were interested in real estate. And that meant even further slowing of the housing price appreciation.

And then disaster struck.

The End of an Era

In October of 2006, the subprime home loan industry begin to break down. Wall Street investors, monitoring the default rates of mortgage portfolios and concerned about the continuing drop in real estate prices nationwide decided to stop purchasing subprime loans. By March of 2007 the entire subprime industry as we knew it was gone.

First time home buyers, as well as seasoned investors, had taken advantage of the easy guidelines offered by these lenders and had flocked to the real estate market in droves. And suddenly, the subprime market came to a screeching hault.

With the demise of the subprime industry millions of potential home buyers are now searching for alternative mortgage products that will accommodate their financial and credit profiles.

Does this mean that first time home buyers will no longer qualify for a home loan? No. There are other alternatives besides the subprime mortgage loan.

There are several solutions. Fannie Mae’s American Dream Commitment offers the most exciting, affordable first time home buyer loan solution that we have seen. To quote Fannie Mae, "Many Americans still are being overlooked, underserved, and overcharged in their search for affordable homeownership." In defining their goals, Fannie Mae strives to "expand access to homeownership for first time home buyers and help raise the minority homeownership rates with the ultimate goal of closing the homeownership gap entirely."

This commitment translates into flexible, accommodative, and low cost home financing available to first time home buyers with less than perfect credit and restrictive budgets. But that’s not all. Reading into the guidelines carefully one will discover some amazing and thoughtful criteria. Amongst these guidelines are included a surprising and liberal allowance for "undocumented income", expanded seller contribution tolerance, and a complete absence of saving and asset reserve requirements. All of these flexible rules make possible the lowest cost, no money down mortgage program available anywhere.

Credit score requirements are now the easiest of all of the first time home buyer loan programs available in the home loan market. The guidelines allow for a score of 620, but with moderate compensating factors lenders may approve loans with scores as low as 600.

Maybe the most surprising aspect of this program is the allowance of undocumented income. Fannie Mae allows up to one thousand dollars per month of income from a reasonable source to be used. Neither the source of the income nor the income itself needs to be documented. You simply need to state it on your application. This rule gives a nod to the working person that holds a side, weekend, or evening job, often to make end meets. Examples of acceptable income include someone working in finance that helps people prepare tax returns on the side, a carpenter that moonlights as a handyman, or a laborer that mows lawns on the weekends.

In addition to this program, nearly every state offers some form of loan help for first time home buyers. In closing, it cannot be emphasized enough that in spite of the subprime mortgage crisis, there remains ample funding and programs for first time home buyer loans.



Katie