Fannie Mae / Freddie Mac mortgage loans could get expensive
Feb 2011 22

More details are emerging on exactly how the federal government’s proposed changes to lending guidelines will affect home-buyers looking to borrow money.

Kenneth Harney talks about the proposed changes (many will require votes in Congress, so are subject to change) in this week’s Boston Herald column, Say goodbye to Fannie’s low rates.

There are multiple things going on.

First, of interest to us in the downtown Boston real estate market, it seems likely that the recent change to what qualifies as a “conventional loan” will be modified back down to its historic levels. So, if you’re taking out a mortgage loan greater than $417,000, you’ll probably have to pay a higher interest rate. During the past couple of years, “jumbo loans” up to $729,750 in some cities were eligible for lower rates. No longer. So, if you’re hoping to pay the lowest interest rate, you’ll either have to buy a smaller home, or, more likely, have a larger down payment.

Second, typical minimum down payment amount requirements may rise to 10 percent, or more. The way it works now, your lender gives you the money to buy a home. It then “sells” the loan to Fannie Mae or Freddie Mac, which pools it together with a bunch of other, similar loans, and sells them as securities on the bond market. This means your lender now has more money available to make home loans to other borrowers.

Under pressure to reduce the risks it is facing by guaranteeing loans, the federal government wants to require borrowers put down more money when purchasing homes, the idea being that homeowners will be less likely to bail out of the loan obligations if they’re at risk of losing a lot of their own money.

The other big change is that you may be required to have a higher down payment if you’re taking out a Federal Housing Administration (FHA) loan. The FHA insures your loan against default. You get a loan from an FHA-approved lender and pay a fee as insurance, the rate of which is based on your perceived credit risk.

FHA loans have exploded in number during the past couple of years, because of the troubles of Fannie Mae and Freddie Mac and also because they’ve raised maximum amounts for FHA loans. As of now, 30-percent of all new loans are FHA-insured. This is making a lot of people nervous, given how things turned out with the other government-backed agencies. In order to reduce the potential risk the US government (and, tax-payers) face, there is pressure to raise minimum down payment amounts (and perhaps, raise fees) on FHA-insured loans.

There are a lot of changes coming down the line.

The best advice I can give is to speak with a lender, today, to find out what you’ll be required to pay in order to get the lowest-cost loan with the best terms for your individual situation.

If you would like some recommendations, please don’t hesitate to ask.

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