Francis A. Betancourt-Molina is senior vice president of
national mortgage-credit policy for Florida Capital Bank
Mortgage. Betancourt-Molina has more than 22 years of experience guiding the development, maintenance and communication of the bank’s mortgage-credit policies across retail,
wholesale and correspondent lending channels. Additionally,
she monitors credit policy changes, tracks results to ensure
acceptable credit-risk exposure and mentors her peers in
areas of regulatory and compliance requirements. Reach her
at email@example.com or (904) 428-1154.
You Should Learn More
About These Loan Options
Fannie and Freddie offer attractive alternatives to
tried-and-true FHA financing
By Francis A. Betancourt-Molina
Since 1934, Federal Housing Administration (FHA) loans have proven to be a popu- lar choice for first-time homebuyers and low- to moderate-income borrowers, or
those with less-than-stellar credit histories. FHA loans
offer buyers several advantages, including low downpayments, seller contributions of up to 6 percent of
the sales price and other flexible financing options.
With more than 80 years of history as a home-loan
program, name recognition alone helps FHA stand out
as an option for borrowers. It’s not the only option,
however, when it comes to mortgages designed to
serve these homebuyers. In recent years, government-sponsored enterprises (GSEs) Fannie Mae and Freddie
Mac have both introduced affordable mortgage programs that offer similar benefits: Freddie Mac’s Home
Possible Advantage, introduced in December 2014;
and Fannie Mae’s HomeReady, introduced in September 2015. Both of these products require a 3 percent
downpayment, which is lower than the 3. 5 percent
downpayment required for FHA-backed loans.
Some originators favor FHA loans because they simply are unaware of how these newer products compare.
Those originators who gain a better understanding
of these products, however, can better serve homebuyers — and generate more business in the process.
Home Possible Advantage
Freddie Mac’s Home Possible and Home Possible
Advantage products were designed to appeal to borrowers who would typically seek FHA loans by allowing for more flexibility in financing terms and features.
The Home Possible mortgage offers up to 95 percent
loan-to-value (LTV) financing. Home Possible Advantage increases the LTV up to 97 percent — with up
to 105 percent for the combined LTV if the borrower
is receiving secondary financing, as a form of downpayment assistance, through a Freddie-qualified
“Affordable Second” mortgage. The increase LTV up to
97 percent is also available on no-cash-out-refinance
mortgages, regardless of who currently serves the
One of the biggest differences between this product and an FHA loan can be found in the mortgage-insurance requirements. FHA requires an upfront
mortgage-insurance premium of 1.75 percent of the
base loan amount, as well as monthly mortgage-insurance payments regardless of the LTV, whereas
Home Possible Advantage does not require an the
upfront mortgage-insurance premium, and mortgage
insurance is not required if the LTV is 80 percent or less.
The difference in the monthly mortgage-insurance
rate between these two products may be the differ-
ence between qualifying or not qualifying for the
Let’s examine, for example, a 30-year fixed-rate
mortgage with a loan amount of $250,000. For an FHA
loan, with a maximum LTV is 96. 5 percent, a 1.75 percent upfront mortgage-insurance premium is required
as well as a monthly premium payment for the life of the
loan. Home Possible Advantage with a 97 percent LTV
will not have an upfront mortgage insurance premium,
only a standard monthly mortgage-insurance premium
that terminates once the LTV reaches 80 percent.
Oftentimes, the borrower’s monthly mortgage payment is lower under the conventional Home Possible
Advantage mortgage as compared to an FHA mortgage because of the reduced monthly mortgage-insurance premium required, thus making this product an attractive option for borrowers on a budget.
What’s especially attractive about this product is
that its flexible features do not require borrowers to be
first-time homebuyers to qualify. All borrowers must
occupy the property. The borrowers’ annual income
cannot exceed 100 percent of the area’s median
income, or in a high-cost area, the borrowers’ annual
income can exceed the area’s median income by a
specified percentage indicated by Freddie Mac’s
income-eligibility search tool. Income limits are waived,
however, for properties located in low-income census
tracts or designated disaster areas.
Homebuyer education is only required when all
borrowers are first-time homebuyers or when the
borrowers do not have an established credit history
on either a purchase or refinance transaction. This
requirement can be met when at least one borrower completes the homebuyer education program or
Freddie Mac offers a free literacy curriculum, called
CreditSmart, that fulfills the homebuyer-education requirement. Alternatively, borrowers can enroll in financial literacy courses from a Department of Housing
and Urban Development (HUD)-approved non-profit
agency or enroll in a free homeownership course
offered by a private mortgage-insurance company.
Fannie Mae’s HomeReady mortgage provides competitive features that also appeal to low- to moderate-income borrowers. Like Home Possible Advantage,
this product offers financing up to 97 percent LTV and
also is not limited to first-time homebuyers. At least
one borrower is required to complete homeownership
education from an approved list of sources.
Fannie Mae’s Framework program can be completed
online at any time prior to loan closing and requires
a $75 registration fee. A homeownership counseling
agent from a HUD-approved nonprofit counseling
agency also can provide the education, so long as
the course is completed prior to the borrower signing
a purchase contract. Mortgage-insurance providers
do not qualify as an approved source for homebuyer
education through the HomeReady program.
Borrowers must meet specific criteria to qualify for
a HomeReady mortgage. Household income is limited
to 100 percent or less of the area’s median income.
“With more than
80 years of history,
alone helps FHA
stand out as
an option for
not the only
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