The Federal Housing Finance Agency (FHFA) introduced rate discounts for first-time home buyers using Fannie Mae- or Freddie Mac-backed conventional mortgages, a much-welcomed relief to housing costs in today’s housing market.
Economic uncertainty always affects the housing market. And when the housing market is facing challenges, it hits first-time home buyers hard. The FHFA rate discounts can make or break your American Dream of homeownership in a housing market where interest rates have hit 20-year highs.
First-Time Buyer Loans may or may not be suitable for you. But these programs can put you in a position to finally buy a home of your own once you understand how these loans work. The FHFA’s rate discounts just rolled out could help first-time home buyers looking for support now!
First-Time Buyer Loans providers
Various providers offer conventional mortgage programs targeting people hoping to buy their first home. However, first-time home buyers face particularly difficult challenges in the current market of high home prices and high-interest rates.
The Great Depression drove the Federal government to create agencies to support and facilitate mortgage lending: Fannie Mae, Freddie Mae, and FHA.
- Fannie Mae (Federal National Mortgage Association) does not offer mortgage loans to home buyers. It buys and guarantees mortgages from lenders. This system funnels money to major commercial banks and mortgage lenders so that they can offer mortgages to qualified low- and moderate-income customers.
- Freddie Mac (Federal Home Loan Mortgage Corporation) also buys loans. Unlike Fannie Mae, Freddie Mac supports smaller banks, savings and loan associations, and other mortgage lending sources.
- The Federal Housing Administration (FHA) was designed to help spread equality in housing opportunities by insuring loans made to buyers who would not qualify under the FNMA and FHLMC guidelines.
Together, they create and oversee a pool of funds, making mortgages available to more people than before the agencies were created. Before the Depression, lenders limited mortgages to high-income customers who could come up with high down payments and short-term paybacks.
FHFA Rate Discounts Explained
Conventional mortgages take different factors into account when it comes to pricing a loan, or arriving at the interest rate a borrower will be offered. Factors include FICO score, amount of down payment, loan amounts, and debt-to-income ratios. However, the FHFA’s recent action has increased the pool of available mortgage funds by eliminating or reducing upfront fees attributed to these loan factors by as much as 1.75% for people applying for First-Time Buyer Loans. This can effectively increase a buyer’s buying power by up to 15%. So instead of only being able to afford a house up to $350,000 for example, the borrower can now qualify to buy a house up to $402,500 while paying the same monthly payment.
FHFA Director Sandra L. Thompson believes that “eliminating upfront fees for certain first-time home buyers, low-income borrowers, and underserved communities” will “promote sustainable and equitable access to affordable housing.” This break applies to HomeReady, Home Possible loans, HFA Advantage, HFA Preferred loans, and single-family mortgage loans under the “Duty to Serve” program. (The FHFA rate discount applies to Conventional Loans — with different qualifying guidelines.)
First-time home buyers include those who have not owned a residence in the past three years, single parents, and those who have been displaced. First-Time Buyer Loans are offered to those who meet the financial guidelines and want to buy a qualifying property.
- Income must be at or below the AMI (Area Median Income).
- The loan must be a new loan; it does not apply retroactively or to refinancing.
- The mortgage must be on a primary residence, not a vacation home or rental property.
Advantages for First-Time Home Buyers
According to the National Notary Association®, “First-time buyers made up 31% of all home buyers in 2021.” With such a significant pool of potential home buyers, the new changes will stimulate investment in homes across many underserved communities. As we see the housing market slowing down, this will also increase sales and keep prices from falling further.
Eligible lending programs allow first-time buyers to put less money down on mortgage loans with lower interest rates than the prevailing market rate. The lenders have less-demanding credit requirements and offer lower monthly payments. These programs bring more buyers into the housing market, effectively ensuring its supply and demand balance.
Disadvantages for First-Time Home Buyers
As with all things, First-Time Buyer Loans come with some limitations. The First-Time Buyer Loans have some elements that are unavoidable yet less favorable than standard loans:
- Mortgage Insurance: Lenders require borrowers to purchase mortgage insurance (MI), protecting the lender against the borrower’s default. The insurance lowers the risk to the provider and passes the cost onto the client buyer.
- Qualifying property: First-Time Buyer Loans empower owner-occupant buyers. It was not meant to help people buy vacation homes or investment properties. Moreover, buyers seeking to finance a condo are limited to a condominiums list approved by the loan agency.
- Appraisal conditions: First-Time Buyer Loans require a very small or no down payment. So the lender has to ensure the property is in good shape to secure their interest in extending the loan. FHA and VA loans tend to have more stringent property requirements than conventional loans with large down payments.
Moreover, the appraiser must assess issues related to the property’s land features. For example, the appraiser must consider how water drains because it could present a life and health hazard. The appraisal may also inspect the roof, foundation, and heating system.
This approach stretches out the mortgage approval and settlement process, discouraging agents and sellers from looking for buyers with FHA or VA financing.
Are First-Time Buyer Loans for You?
Before the COVID-19 pandemic hit the housing market, homeowners saw their property values soar. It was a “sellers’ market” because housing demand had surpassed the inventory of available properties. That inventory has shrunk significantly, yet pricing on homes continues to rise year-over-year in most regions.
Still, Americans dream of owning a home, and First-Time Buyer Loans help many achieve that dream of becoming a homeowner. Buyers get that conventional loans have effectively kept them out of the real estate market. So, they welcome the chance to leverage FHFA Discount Rates to offer more affordable First-Time Buyer Loans for them.
Are First-Time Buyer Loans good for you? The answer holds true now and for the foreseeable future. If you can make the larger down payment and get into a no-MI conventional loan, then go for it. But if your small down payment and maybe high rates has kept you out of the market, you should shop for a First-Time Buyer Loan and take advantage of FHFA Discount Rates today!