We've all seen the news over the past year about record-low interest rates, but what's the deal with the housing market still being slow? It seems obvious that buyers would be jumping on the opportunity to get a mortgage at these rates, but the number of new homeowners hasn't been hitting, or even coming close to record levels. That is because while interest rates are enticingly low, the requirements to qualify for a home loan have been very stringent. Here's a little Finance 101 as to why - keep in mind i'm not an expert, just an interested Realtor!
Mortgage lenders generally sell their mortgages to Fannie Mae and Freddie Mac (who guarantee a majority of loans in the US), and Fannie and Freddie penalize lenders for selling them mortgages that don't fit their guidelines for loan qualification. The guidelines were re-written and tightened a few years ago, mainly to avoid another housing crash and ensure that buyers could afford the homes they were getting. Some of the guidelines they provided were vague, though so lenders have been erring far on the side of caution to avoid getting penalized. This lack of clarity has led to people getting denied for loans, even when they appear to qualify on paper. This is clearly not a fun process for home buyers to go through, and is frustrating when qualified buyers are ready to buy and want to get a home while mortgage rates are low.
BUT WAIT... THERE'S HOPE!
Last week, an agreement that occurred in October went live, and Fannie and Freddie have not only clarified the guidelines further, but loosened them, as well. The guidelines have been shifted to allow down payment amounts as low as 3% of the purchase price-- THAT'S RIGHT, FOLKS, 3%! That means that qualified buyers who have a low down payment won't be forced to get FHA loans, which do offer benefits of their own, but aren't ideal for everyone.
FHA loans usually only make the most sense when borrowers have low credit (below 620) and cost more to those with better credit, but borrowers with good credit and not a lot of cash have generally been forced to go the FHA route anyway because they can't produce a down payment of at least 5%. This new down payment program will make it possible for many home buyers in 2015 to qualify for conventional home loans, and actually take advantage of the great interest rates!
Even one percentage difference in your mortgage rate can save you thousands over the life of your loan, so buying when the interest rates are low is highly beneficial to you.
If you would like more information on this or are interested in learning about the home buying process, contact me today!