LOS ANGELES â€” Home prices are rising across the country and mortgage rates, though still historically low, are up since the presidential election.
Simply put, buying a home isnâ€™t easy, especially in high-cost metropolitan areas.
But changes in the mortgage industry are afoot, with the goal of loosening some of the strict standards established after the subprime crisis â€” rules some blame for impeding sales.
â€œThe reality has sunk in that there are buyers out there who will be able to buy homes and make the mortgage payments,â€� said William E. Brown, the president of the National Association of Realtors. The industry is â€œtrying to give them more options to buy a house.â€�
Government-controlled mortgage giants Fannie Mae and Freddie Mac are paving the way by rolling out new programs to encourage homeownership.
The companies, with their congressional mandate to promote homeownership, donâ€™t originate loans, but purchase mortgages from lenders to keep the market moving. And any changes they make in the underwriting standards for the loans they buy can have a big effect.
Also, lenders are moving to relax some standards partly because they fear losing business as home prices and mortgage rates rise, said Guy Cecala, publisher of Inside Mortgage Finance.
â€œIf your business is going to drop 20 percent,â€� he said, â€œyou need to come up with ways to offset that.â€�
The changes bring lending nowhere near the easy-money bonanza of last decade, which ended in financial crisis. But they have brought criticism from some corners that liberalizing rules for down payments and how much debt a borrower can have is a slippery slope that could eventually lead to another bubble.
â€œThis is what happened last time,â€� said Edward Pinto, a fellow at the American Enterprise Institute, a conservative think tank.
During the bubble, borrowers could often put down nothing at all by financing the entire purchase.
After the crash, standards tightened considerably and federal regulators even floated a proposal to require 20 percent down for many mortgages.
For a low-down-payment option, borrowers usually had to turn to the Federal Housing Administration, which allows 3.5 percent down, but requires costly mortgage insurance for the life of the loan.
Now, borrowers increasingly have more options, though generally they need a good credit score.
The trend started in late 2014 when Fannie Mae and Freddie Mac announced new programs that allowed loans with as little as 3 percent down. But many large banks still reeling from the housing bust that cost them billions were skeptical. Bank of America Chief Executive Brian Moynihan said his company was unlikely to participate.
But less than two years later, the bank started offering 3 percent down loans through a partnership with Freddie Mac. Wells Fargo, the nationâ€™s largest mortgage lender, also jumped in last year, partnering with Fannie Mae. JPMorgan Chase now offers 3 percent down loans as well.
â€œWe are seeing more and more lenders adopting it every day,â€� said Danny Gardner, Freddie Macâ€™s vice president of affordable lending and access to credit.
The 3 percent down loans through Fannie or Freddie are capped at $424,100 in most of the country.
Bank of America launched its program with Freddie Mac after partnering with a nonprofit to provide financial counseling for the life of the loan, a spokesman said. After six months, BofA upped its annual origination cap from $500 million to $1 billion for the Affordable Loan Solution Program, which allows down payments as low as 3 percent.
Some are going even lower.
This year, Fannie Mae started pilot programs with some nonbank lenders to offer loans with less than 3 percent down. The loans require the borrower to have 3 percent equity, but lenders gift borrowers money to meet the equity threshold as long as the borrower doesnâ€™t eventually pay for it through higher fees or interest rates â€” which now average about 3.9 percent for a 30-year fixed loan.
Pilot programs with Guild Mortgage of San Diego and United Wholesale Mortgage of Michigan require the borrower to put down 1 percent of their own money. A pilot through Movement Mortgage allows a borrower to put down nothing.
Another recent change affects how much debt a prospective borrower is allowed to carry as a percentage of their gross income.
After the housing crisis, Fannie Mae established a debt-to-income cap of 45 percent, except for those who put at least 20 percent down and could show they had enough savings to pay their mortgage for 12 months if they lost their job. Exceptions were also made if a borrower received income from someone who lived in the house, but was not on the loan.
Last month, Fannie did away with those special requirements, raising its cap to 50 percent.
Freddie Mac said itâ€™s allowed 50 percent without special exceptions since 2011, but Fannie Mae is larger. A recent analysis by the Urban Institute called Fannieâ€™s new policy â€œa win for expanding access to creditâ€� and estimated it would lead to 95,000 new loans being approved annually nationwide.
With the exploding cost of higher education causing some students to borrow more than $100,000, several changes are directly targeting young homebuyers typically burdened with hundreds, if not thousands, of dollars in monthly student-loan payments.
Among Fannie Maeâ€™s changes:
â€¢ If a borrower has some student loans or other nonmortgage debt paid by parents or others, those payments will no longer count toward their debt-to-income ratio.
â€¢ Once a borrower becomes a homeowner, Fannie will allow them to qualify for a cheaper cash-out refinance if they use it to pay off their high-interest student loans.
â€¢ If a student-loan borrower is enrolled in an income-based repayment plan, the lower monthly payment can be used when calculating a debt-to-income ratio. Before, lenders often had to use 1 percent of the outstanding student-loan balance as the monthly payment.
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