LOW-DOWNPAYMENT MORTGAGES
There was a time not so long ago when 100% financing (no-downpayment) mortgage loans were common. “Smart” buyers used the concept of OPM (other people’s money) to get ultimate leverage on purchases. Lenders thought that they were bulletproof and that their returns would never end. Even if borrowers couldn’t make their payments, rapid appreciation would protect them from losses.

But something happened on the way to untold riches: mortgages suddenly became suspect. The secondary market virtually disappeared for almost all types of mortgages except for the traditionally safe products offered by Fannie Mae, Freddie Mac and Ginny Mae, the conforming market’s leaders. A major by-product of this major market correction has been the disappearance of most no-downpayment options for first-time homebuyers unable to save for the initial investment due to high regional rental costs or who are saddled with student loans. VA loans are wonderful loans available to eligible veterans and personnel and FHA currently requires a almost a 3% initial investment.  Both loans have limits, depending on where the property is.

But Fannie Mae and Freddie Mac do still have 100% options available, though their underwriting guidelines are stricter than before.   Fannie Mae currently offers three:

The “My Community,” Community 100 products requires full documentation (stated income and stated asset loans are gone on many products), have income limits based on the metro area the property is in, debt-to-income ratio limits, as well as minimum credit scores and may have asset reserve requirements.

The choices available are fixed-rate loans or 5/1 ARMs, but amortizations can be extended to 40 years and most can have interest-only options. The key component of these loans is that private mortgage insurance is required.

The Fannie Mae Flexible 100 is similar to the My Community program. It eliminates income limits, but requires that the borrower must contribute at least $500 from their own funds towards closing costs and prepaids. Some versions of the program require a 3% “Flexible Contribution” but the money can come from several sources.

The Fannie Mae 75/25 Fixed Rate is available without MI so long as the 1st trust lender’s exposure is at 75% or less. There are no income limits but the borrower must have $500 invested in closing costs or prepaids. The strength of this program is the ability to get 100% financing above a sales price of $417,000 (Remember that the 1st mortgage cannot exceed the conforming limit of $417,000 but with the 2nd you could have a sales price of $556,000 with no money down!). You will be limited to fixed rate products but it is possible to get an IO option or to use a 2-1 buydown to make the payments more affordable. The trick with this program will be to find the 2nd trust lender since Fannie Mae will only buy the 75% LTV 1st mortgage.

Freddie Mac also offers three options similar to the Fannie Mae products:
Freddie Mac “Home Possible” mirrors the My Community mortgage, but has more liberal income limits. In addition, there may be a requirement for homebuyer education if it is required by the MI company. Freddie will allow for “boarder” income in some cases.

The Freddie Mac 100 is similar to the Fannie Mae Flexible program. Freddie Mac seems to be more flexible on the source of funds for the required $500 or 3% and will allow for lower credit scores. However that might be offset by lower debt-to-income ratios.

The Freddie Mac 80/20 is like the Fannie Mae 75/25 program. The largest purchase, with no money down, would be lowered to $521,250 with the same restrictions as to finding a willing 2nd trust lender.

The trick for 2008 will be to stay constantly alert to what new programs might be available when you are ready to purchase. The face of mortgage lending is changing rapidly with many small and big lenders closing their doors, brokers facing limitations in their product offerings and over-regulation by hud and the govt., and banks closing/limiting their wholesale operations such as Bank of America and National City Mortgage.

The good news is that no-downpayment loans still exist. You will be required to substantiate your income and your ability to pay. In most cases you will have to pay MI, but for many it will be tax-deductible.
If you aren’t inclined to do the research yourself, talk with a  full time mortgage professional… a Choice Finance® Loan Officer.  |  Todays rates
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