Fannie and Freddie's new home loan rules - you need lots of cash
Filed under: Borrowing, Debt, Real Estate
We've all heard that it's getting harder and harder to qualify for a new loan, but no one's been certain exactly what Fannie Mae and Freddie Mac have set as rules in this new financial environment. In a story in today's Wall Street Journal, we find that a borrower needs a credit score of at least 740 to qualify for a home-purchase loan with a 20% down. With that excellent credit score the borrower could qualify for a loan rate of 4.75% plus a 1% origination fee. If a borrower's credit score is below 680, then the best he or she could do would be a 4.75% loan with 2.5% in fees.
So what do you need in cash to buy a home today using Fannie or Freddie? if you've got a score of 740 or higher and want to buy a home valued at $200,000, you would need to have $40,000 to put down on the home plus another $2,000 for fees before you could even think about buying. If your credit score was below 680, you would need the $40,000 down plus $5,000 in fees.
The only way you might find a way to purchase a home with less cash up front would be to work with the FHA. The FHA is still accepting borrowers with low credit scores and down payments of as little as 3.5%.Fannie and Freddie say they are focusing on keeping people in their homes and not on making new loans. The problem is that since Frannie and Freddie are the only players in town for most mortgages, since private mortgage money dried up, there's not much to go around to help people who want to buy a home. The only way we're going to stop the downward spiral in home prices is to reduce the backlog of homes on the market.
While I'm not advocating that Fannie and Freddie make risky loans, I am questioning whether the cash needed up front is realistic to help get homes sold and off the market. Would a 10% down be enough to secure the loan? That might make new loans more affordable and get more homes off the market.
We've seen mortgage applications rise, but hear that many people are being turned away because they don't qualify. Obviously there are people ready to buy, so we need to find a happy medium between safe lending and helping to stabilize the housing market and its pricing.
Lita Epstein has written more than 25 books including the "Complete Idiot's Guide to Improving Your Credit Score" and "The 250 Questions You Should Ask About Buying Foreclosures."
Reader Comments (Page 1 of 5)
1-20-2009 @ 6:39PM
steve said...
Every home buyer needs to have a commitment
to stay put for the long term.When they have no skin in the house it is just too easy to turn in the keys to the lender. I agree that 2.5 points is too much in fees for the lower credit score folks.If they come up with 20% down well that should be adequate to get the loan.
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1-27-2009 @ 9:57AM
Jim Sparano said...
Market conditions will effect the probability of the home owner walking away from the home. When a Borrower has 20% invested into there home and the value drops 80% or more the likelyness to walk away is high because the feeling of obtaining a new house with a lower payment is more valuable than there lost downpayment. The homeowner will find the funds again to purchase even find a co borrower to purchase the next house.
1-20-2009 @ 6:30PM
wendellynnp said...
I have been trying to refinance for a year. Just today I have learned that because I got a new credit card my credit score fell 100 points. WHAT A RIPOFF !!!!! Not only that, every so many weeks I have to provide updated pay stubs even though I have been employed at the same place for 14 years. Freddie Mac is a BIG government ripoff.
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1-27-2009 @ 8:54AM
moderate said...
The fact that you needed a new card to pay for the surgery raises a flag. Fair or not, this is a more responsible way to extend loans. We have become used to easy credit which in turn killed the market. If you do not have the cash for the surgery where will you find the money for your closing costs. Financing or using credit is no longer acceptable. Your best bet is to save save save. when you have a reserve fund then try again to get refinanced.
1-27-2009 @ 12:17PM
jojobeans said...
If yu are only 1 point below, you may try paying down that credit card a little and doing a "Rapid Rescore".
1-20-2009 @ 6:33PM
Lita Epstein said...
Wendellynnp:
Unfortunately, you made one of the biggest mistakes someone can make when applying for a mortgage - applying for new credit (whether a credit card or car loan) before finalizing the mortgage. It's common for your credit score to drop after a new credit account is added to your report. This has nothing to do with Freddie Mac. It's the way credit scoring works. I always advise that people hold off on any new credit applications for a least six months before applying for a mortgage and until after the mortgage closes.
Lita
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1-20-2009 @ 6:57PM
wendellynnp said...
My dog had to have surgery and since we don't have pet insurance this card was a viable option. I only had one credit search in 08. The Lending company did one today. Boom too many credit searchs and a 100 point drop. I had an excellant rating now I fall below the acceptable limit by 1(one) point. Doesn't this sound a little fishy? I told the lender I feel a 100 point drop is discrimation for 1(one) credit card search.
1-27-2009 @ 11:03AM
Tom said...
your article is misleading. Buyers can put down as little as 5% and still get a mortgage in most parts of the country. You can also buy with an FHA loan with only 3% DOWN. There are some markets that will require more because the values are down more than 25% to 35%. In FL.NV.CA AZ. the problem states for the most part have caused most of the problem with easy credit. The x President of Country Wide should be in jail!!
1-21-2009 @ 9:43AM
Lilly Lunelle said...
There are other options as one could choose a mortgage negotiation or loan modification versus a refinance and many times even with a legal team it is cheaper than what your closing costs might be. It also may allow you to reduce your loan amount as home values in certain areas have declined severely. Want to know more a good site to look at is
http://www.mortgagenegotiationcenter.com
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1-21-2009 @ 6:05AM
sgentilejr said...
You might think that 20% down provides the banks with a sense of security, BUT with the way home prices are declining in value they could fall that 20% in one year. Making home mortgage loans at this time when home prices are in a decline is very risky for the lenders. Today you might be mad if turned down for a mortgage loan, but it could be the banks are doing you a favor by turning you down, IF home prices continue to decline, which is very likely..
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1-21-2009 @ 8:19AM
bbnj said...
I recently refinanced a ARM to a fixed with my local bank. Freddie required an origination fee of .75% What happened to the bailout money. Why are we paying higher fees to an organization that already got money from the government. Aren't they having their cake and eating it too?
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1-27-2009 @ 8:31AM
moderate said...
.75 is a good origination. FHA allows up to 1.00%. you saved .25%.
1-27-2009 @ 12:17PM
jojobeans said...
Freddie didn't require the .75% origination fee. Your lender required it and that's how they get paid. It was a legitimate fee and less than you would normally pay so you didn't get ripped off.
1-21-2009 @ 2:41PM
L.J said...
Dear Lilly,
I have a credit score of 820,I have 20% equity in my home, "but" I am self employed and I have a good accountent. my problem is we deduct alot of my income.
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1-22-2009 @ 7:32AM
lillylunelle said...
LJ.
They do not pull credit reports and typically there are no type of income verifications. You most probably would still qualify for a loan modification.
God Bless!
Lilly
1-22-2009 @ 7:32AM
lilly lunelle said...
Typically credit reports and income verifications are not part of a loan modification.
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1-25-2009 @ 10:56PM
Brenda Lachman said...
Buying a home with the intention to short term rent it (waterfront, historic site, theme park, slopes, etc., properties will make the mortgage company give you a better rate, you'd have to proof how are you going to do it. I did it and got me a good deal, made the property pay for itself and then wrote a book about it. Renting vacation properties is a great investment, in the short and long run!
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1-26-2009 @ 12:55PM
John said...
Good advice to follow for sure, I recently bought a new home through a company called Taylor Morrison and this info would definitely be helpful to anyone buying a new home.
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1-27-2009 @ 6:30AM
KJ said...
THANKS, FOCKUP OBAMA
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1-27-2009 @ 9:17AM
moderate said...
How is this Obamas fault, he has only been in office 7 days. The fault lies with People living beyond their means, and greedy banks, loan officers, and individuals.