Take, for instance, the prospect of a low downpayment mortgage, an option attractive to millions of new homebuyers.
According to Freddie Mac's latest U.S. Housing Market Insight & Outlook, "low downpayment initiatives are different this time in extending the opportunity for homeownership to qualified borrowers who might otherwise be locked out."
The report says that pre-Great Recession low downpayment underwriting allowed layered risk. "That is, the combination of multiple features that amplified credit risk, Freddie Mac states.
But post-Great Recession downpayment underwriting has lowered risk barriers for lenders, primarily by requiring features that reduce risk, such as fixed payments, borrower-based underwriting, reliable appraisals and more. As a result, there's a change in the mindset of the American consumer, at least when it comes to mortgages. "Borrower irrational exuberance has been replaced by realistic expectations, so even some consumers who could qualify for a mortgage are choosing to rent, at least for a while longer," Freddie Mac reports.
The Freddie Mac outlook, which also calls for a 14% increase in housing starts and an 8% increase in new mortgages this year, is a warning shot across the bow for new homebuyers. That said, just because it may be tougher for borrowers to get a low downpayment mortgage, doesn't mean they can get one. And that's good for the entire housing market.
"Previous research has found that reduced down payments can increase the relative probability of home ownership among some groups by over 25%," says Sean Becketti, chief economist at Freddie Mac. "As long as the underwriting process bars the return of the layered risks prevalent in the pre-crisis era, lower down payments are not a cause for concern."
To cut a good low downpayment mortgage deal, expect some serious tire kicking among lenders, and plenty of wheeling and dealing between lender and borrower.
"Finding a lender to discuss home affordability, personal financial needs and total cost of homeownership should be the very first step a buyer takes in the home-buying process, says Scott Haymore, head of pricing and secondary markets at TD Bank. "First-time buyers may find it difficult to save for a large down payment, especially younger borrowers that may be saddled with large student debt loans. The good news is many banks offer programs that allow first-time buyers to put down a smaller down payment."
Haymore cites TD Bank's Right Step mortgage, which only requires 3% down and no mortgage insurance. "That can help first-time buyers achieve their dream of homeownership without having to save for many years," he adds.
Michael Banovac, managing partner at the real estate firm RMB Luxury Real Estate in Phoenix, says buyers are clamoring for low downpayment mortgage deals these days. "But you have to prepare first," he states. "Before getting a low downpayment mortgage you'll need to prepare a minimum of four months in advance. That will give you time to get your finances in order."
Watch out for potential red flags that can sink a deal. "One of the things a lender will look for is large sums of monies going in and out of your accounts 90 days prior to applying," says Banovac. "Large deposits and withdrawals during that 90-day time frame are a potential deal breaker, so avoid them. Lenders want the money to be "seasoned" -- that is resting in your account for a couple months' time.
Lenders will also be looking for a couple of things, Banovac adds:
1) Good to great FICO score.
2) Pay stubs.
3) Last two years of tax returns.
4) Other outstanding debt obligations.
"The key to putting as little money down as possible is to make sure you're applying for a primary residence loan, you have your last two years of tax returns ready and preferably showing an increase in income, and you have minimal debt obligations on your credit report with a FICO over 730," Banovac says. "The ironic corollary is the more you pay and report to Uncle Sam, the more you can borrow for a low downpayment mortgage."
Homebuyers who have snagged a low downpayment mortgage deal say that, often, a government-backed FHA loan that only requires 3.5% down, is in the mix. "That's what I did," says Matt Johnson, a 27-year-old real estate investor who has purchased several homes in the past few years. "It's a great deal," he says. "The only downside is that until you achieve the necessary loan to value ratio to secure the property for the mortgage company, you will need to carry mortgage insurance, which will unfortunately bump up your payment a little bit."
Johnson advises shopping online and checking with local credit unions to secure a low down payment loan. Those loans are out there; you just have to dig hard to find a deal that works for you.