Sunday, March 06, 2005

$500 down and you've got a house, if you can afford one

By Gregory J. Wilcox, Columnist

Mortgage giant Freddie Mac is touting a new duo of loan products that will help people buy a house with as little as $500 out of pocket, good news in markets like this one featuring record prices.

Called "Home Possible Mortgages," the package of loan products is targeted toward families and what the company terms key community workers -- those in health care, cops, firefighters and teachers across the country.

The loans feature low or no-down payments and flexible credit-underwriting standards, components expected to help thousands of families with nest-egg issues or flawed credit to buy a house.

Freddie Mac's goal is helping low-and moderate-income borrowers anywhere in the country get an affordable, low-cost conforming conventional mortgage.

The key word is conforming, which means there is a limit on how much can be borrowed. In California, the conforming limit for this year is $359,650, up from $337,700, said Leslie Appleton-Young, vice president and chief economist at the California Association of Realtors.

That's well below the median price in the state, Los Angeles County and the San Fernando Valley.

So using these tools might be harder here than other places. But it can be done if a buyer is willing to do a lot of looking, and maybe make some location compromises for ownership.

"They are really very important, but it varies depending on what community you are in. They are more attractive in the inland areas of the state," Appleton-Young said.

Freddie Mac doesn't make the loans but buys them from its huge base of mortgage issuers, which includes all the major players in California.

David Stevens, Freddie Mac's senior vice president of single-family sourcing, said the program has a basic goal: getting more lenders to say yes to more borrowers.

Freddie Mac's products will complement those already in the marketplace.

"There are a multitude of affordable products done by banks or that Freddie Mac provided to lender partners," Stevens said.

What's different is this program can be individually tailored to a buyers needs by lenders that use Freddie Mac's Loan Prospector, an automated underwriting software.

"Tens of thousands of people in the mortgage business will have access to this product," Stevens said.

Prospective buyers visit a lender, answer some basic questions about income and job history and in a couple of minutes find out if they qualify to buy a home and, if so, how much they can spend.

Here's a look at the two products.

The basic Home Possible mortgage is available either as 100 percent financing for single-family home purchases or no-cash-out refinancing. Down payments of up to 5 percent can be required for buildings with up to four units.

But both versions allow borrowers to put down as little as $500 of their own money.

The Home Possible Neighborhood Solution Mortgage is targeted toward cops, firefighters, teachers and heath care workers. These loans have even higher debt-to-income ratios than a typical high loan-to-value mortgage and a three-year subsidy buy-down that reduces the initial interest rate as much as 1.5 percentage points in the first year and 0.5 percentage points per year for the next two. The buy-downs can come from a wide range of sources, such as gifts or grants. Components of this feature can boost the buying power by up to 30 percent, something Stevens says is important in high-priced markets like ours.

Qualified borrowers can use Home Possible Neighborhood Solution Mortgages to finance one- to two-unit properties in or near the communities they serve.

The loans are available as 15-, 20- and 30-year fixed-rate mortgages or as 7/1 or 10/1 adjustable-rate mortgages for one-unit properties. The latter means the rate is fixed for seven or 10 years, then adjusts every year after that.

Borrowers can earn up to their area's median income or if they earn more than the area median income, they can buy or refinance a home in an underserved market area. Lenders will provide more details.

And all participants must complete a pre-purchase borrower-education program.

Potential buyers need to keep in mind that Freddie Mac is just starting the lender-training portion of the program and this could take several months.

But it won't hurt to contact a lender now and ask whether they are familiar with this program. If they are, you can start the application process rolling and find out how much house you qualify to buy.

Early returns suggest this will be a popular buying option.

"We are being overwhelmed with lender response and are having to add extra classes," Stevens said.

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