Fannie Mae, the country's largest source of home mortgage money, has come up with a new loan that is custom-tailored for people with good credit but very little cash.
Dubbed the Flexible 97, the new mortgage carries a minimum down payment of 3 percent but allows all of that money to come from a gift or unsecured loan from a family member or cash assistance from an employer or other sources. In most conventional low-downpayment programs, by contrast, at least 3 percent of the loan amount must come from the applicants' own personal cash resources.
The Flexible 97 concept also allows home sellers to contribute up to 3 percent of the mortgage amount toward a home buyer's closing costs. In a market where closing costs average 4 percent of the loan amount, for example, an aggressive home buyer could ask a motivated seller to pay as much as three-quarters of the total settlement costs.
The interest rate on the new loans will be the going market rate for 30-year, fixed-rate mortgages, currently a little above 7 percent. Unlike low-downpayment concepts from other lenders and the Federal Housing Administration (FHA), the new Flexible 97 program has a high maximum dollar ceiling nationwide ($227,150) but no maximum household income limitations or requirements for home buyer counseling.
Hypothetically you could earn $100,000 a year and buy up to a $234,175 house with minimal cash out of pocket using a Flexible 97 provided you qualify on credit worthiness tests, receive the maximum-allowable downpayment help from your family and persuade the seller to pay most of your closing costs.
Behind the new Fannie Mae program are several developments that make such high-leverage lending possible. Tops on the list are recent advances in mortgage risk-scoring technology that enable a lender to "see through" a borrower's application and predict his or her true risk of default with exceptional accuracy.
Fannie Mae will use its high-tech electronic underwriting system, called Desktop Underwriter, to evaluate applications for the Flexible 97s. The system employs credit bureau data, information about the property you're financing and other factors to distinguish between people who are good risks and those who are not.
There will be no minimum credit score levels to qualify for the program, according to a Fannie Mae official, but your credit profile will need to demonstrate not only responsible use of credit in the past but an ability to pay the future monthly mortgage debt for the home you're buying.
The new program is the outgrowth of a low-downpayment, low-cost-to-close experiment Fannie began in May 1996. Working with 100 lenders around the country, Fannie financed about 6,000 borrowers using terms similar to those in the Flexible 97. The reaction from both borrowers and lenders was so favorable, according to Brian Graham, Fannie's vice president for single-family business, that the corporation decided to roll it out for the general home-buying public.
Lenders won't be fully geared up to take applications until early June, and only those who do business with Fannie using the electronic Desktop Underwriter system will be able to offer the Flexible 97s. Here are features that could affect your application:
+ If you're getting help with the 3 percent minimum downpayment, you can't get any of the money from "any party involved in the transaction." That means that, if the seller or either the seller's or your real estate agent offers to lend you the cash, it won't qualify, but you can take the money in the form of "a loan secured by a marketable asset such as a 401(k) retirement account" or a loan or grant from "a nonprofit or government agency."
You can't take the money from a family member in the form of a loan secured by the house you're buying. Family loans or gifts, in this case, have to come with no real estate strings attached.
+ Though there are no income limits for borrowers, Fannie's intent is that the new low-downpayment program principally benefit families with moderate or lower incomes who, despite good credit, might not otherwise purchase a home. In its two-year test of the concept, about 60 percent of the borrowers were first-time buyers and nearly half had incomes below the area median.
+ The new Flexible 97s should be particularly attractive to borrowers considering a low-downpayment FHA mortgage. On a cash-to-close and equity-buildup comparison, the new Fannie program should be better at the bottom line in most cases than FHA or other competing downpayment competitors without income limits.
Before applying for a Flexible 97 or any other loan, do a thorough cost, rate and fees comparison yourself. Remember, the better your credit, the better rate and terms you can get in a market that uses electronic underwriting risk analysis.
For information on the Fannie program and local lender participation, call (800) 732-6643.