Home buyers get more help

A number of recent changes in the law and in the way that lenders do business are making it easier for people to buy a home and get a mortgage. Taken together, these changes suggest that things are moving back in a direction favorable to purchasers – after a decade in which laws and lending policies have repeatedly tightened things up.

This is a big shift. According to the Urban Institute, a Washington, D.C. think tank, some 1.2 million additional home loans would be made each year if lending rules and practices returned to their historical norms.

Here’s a look at some of the recent changes:

► Lower down payments. After the housing bust, the government wanted to prevent another round of risky loans that led to foreclosures. So it required that lenders insist on higher down payments if they wanted to have Fannie Mae or Freddie Mac buy or guarantee their loans. And if a lender wanted to sell a loan to someone other than Fannie or Freddie, it had to require a 20% down payment or else keep part of the risk itself.

Last fall, though, Fannie and Freddie announced plans to once again start buying and guaranteeing loans with smaller down payments – in some cases as low as 3%.

At about the same time, federal regulators dropped the requirement of a 20% down payment in order for lenders to re-sell a loan to private investors. (Now, lenders merely have to verify the borrower’s ability to pay and make sure the borrower’s total debt-to-income ratio isn’t more than 43%.)

While not all banks have responded immediately, many lenders have now begun approving mortgages with much lower down payments than before.

► Looser rules and less paperwork. As part of its crackdown after the housing bust, the federal government adopted rules saying that if Fannie or Freddie bought a loan that went into foreclosure, and it turned out that the lender had made some error in the initial paperwork years ago – even a fairly minor or technical one – Fannie or Freddie could force the lender to take the bad loan back.

As a result, many lenders adopted “overlays” in which they required borrowers to have additional qualifications and provide additional documentation over and above what was normally required by Fannie and Freddie. Since it wasn’t always clear what kind of error could trigger a buyback, lenders were scared that making even one tiny little mistake could jeopardize a loan.

That’s the main reason lenders have been so obsessive in recent years about documentation, which has frequently delayed or even capsized loans.

However, last fall Fannie and Freddie reached a settlement that defines exactly what sorts of mistakes will cause a lender to have to take back a bad loan years after the fact. This gives lenders more certainty, and is causing them to relax their rules.

Many lenders have now done away with almost all of their overlays, according to the Mortgage Bankers Association. As a result, they are approving more loans and processing loan applications much faster.

As an example, if a couple missed a single car payment in the past, they might have been required to explain the reasons in detail in writing, even if the missed payment wasn’t particularly important to the loan decision. Now, requirements like these are often being waived.

► Cheaper FHA insurance. The Federal Housing Administration insures many mortgages, including mortgages with low down payments of as little as 3.5%. In return, borrowers must pay insurance premiums against a default. Recently, the FHA lowered its annual insurance rates for typical borrowers from 1.35% to 0.85%. This change could save a typical borrower as much as $1,000 a year on a $200,000 loan, and could make mortgages easier for many people.

The lower rates will be applied to new mortgages. It appears homeowners who already have an FHA-backed loan may need to refinance in order to take advantage of the decrease.

► Free credit scores. More than half of adults in the U.S. will soon have free, regular access to their FICO credit scores, as a variety of major banks and financial institutions have decided to start providing this information to at least some of their customers.

The institutions include Discover, Bank of America, JPMorgan Chase, Ally Financial, Citigroup, Barclays and Sallie Mae.

This can be very helpful to home buyers in allowing them to regularly monitor and improve their credit.

You should note, though, that the FICO score you receive from these institutions may not be exactly equal to the score a mortgage lender obtains on you. That’s because lenders may access data from different credit scoring agencies, and may use slightly different FICO scoring models.

► Repurchase after foreclosure. In another move, Fannie and Freddie announced that owners of some 121,000 homes that the mortgage giants have foreclosed on can now buy them back at market value – even if they owed more than that amount on their mortgage at the time of the foreclosure.

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