The opportunity for homebuyers with little or no credit to qualify for a mortgage will widen considerably later this month, when housing finance giant Fannie Mae will push the "start" button on an automated underwriting program that doesn't require credit scores. This move will make it easier for millions of so-called "thin file" people to qualify for a home loan.
But just a few days later, the Federal Housing Administration (FHA) will begin counting payments on student loans as part of a borrower's debt load -- effectively knocking many buyers out of the running for government financing.
Until now, borrowers with little credit history found it difficult, if not impossible, to obtain a mortgage from a local lender that sells its loans to Fannie Mae on the secondary market. But starting June 25, such borrowers will be eligible if they can provide a verification of rent for the previous 12 months, plus a year's worth of on-time payments to a utility or a local gym.
During the initial phase-in period for its new "trended data" initiative, Fannie Mae will be looking at two key factors: 1. Do mortgage applicants pay off their entire credit card debt each month, or do they carry a balance? and 2. Do they exceed their available credit limits?
Meanwhile, starting June 30, if you are carrying debt from student loans, it will become more difficult to qualify for low down-payment financing insured by the FHA.
Seven out of every 10 college graduates these days borrowed money to pay for their higher education. According to one report, the typical grad with a bachelor of arts degree leaves school with a debt of $30,000, usually paying $350 a month. Those who go on to grad school have an average of $50,000 in student debt.
All is not lost, though. Miami-based Burkey Capital says that it intends to roll out a new loan program that will allow grads to "basically refinance (their) student loans into a mortgage," says CEO John Burkey.
So if you wanted to borrow $500,000 to buy a house and had student loans totaling $50,000, you'd need a down payment of roughly $50,000, according to Burkey. But you'd end up with basically a 100 percent loan-to-value mortgage of $500,000 -- at a lower rate than what you were likely paying on your school loans.
As you can tell from the example above, the company intends to initially target "top tier" borrowers with strong work and academic profiles in select states. But a nationwide rollout is planned by year's end. The financial services company intends to originate its "BurkeyLoans" and hold them in its investment funds.
If student loans aren't holding back millions of millennials from the housing market, then fear might be -- the fear of losing their shirts by buying a house and then watching its value plummet. After all, that's what happened to many of their parents during the housing recession, and some are still underwater, meaning they owe more than their houses are worth on today's market.
Enter a new insurance product that protects a portion of a borrower's down payment should they have to sell at a loss.
Currently offered by only one lender, Amalgamated Bank of New York, Plus by ValueInsured covers up to 20 percent of a home's purchase price or the actual equity lost, whichever is lower. The insurance kicks in if a borrower has to sell the house in two to seven years after closing and cannot recoup his down payment because of a "market-driven" decline in prices.
At the same time, some of the biggest names in finance -- Fortress for one, KKR for another -- are backing an effort by Overture Technologies to bring private capital back into the mortgage market and expand financing opportunities for folks who cannot qualify for FHA mortgages or loans that will be sold to Fannie Mae or Freddie Mac. Currently, the FHA and the two government-sponsored secondary market companies dominate the market. Private investors have all but vacated housing finance because of the housing bust and the resulting mortgage market meltdown.
But Kim Thompson, executive vice president at Overture, says there is a big appetite on the part of investors for loans that don't conform to the major players' standards. And Overture's end-to-end distribution platform makes it easier for investors to identify worthy borrowers and price loans based on their potential risk.
Thompson says investors specifically have an eye on the 5 million or so people who lost their homes through foreclosure during the recession, but would like to become owners once again. Under Fannie and Freddie's rules, these so-called "boomerang buyers" have to wait up to seven years to qualify, among other requirements.
Finally, for people buying rental houses as an investment, AssetAvenue is now financing single-family homes and two- to four-unit properties for up to 30 years. Previously, five to seven years was the limit.
Because the loans are considered to be commercial mortgages, they will be underwritten based mostly on the borrower's debt-service coverage ratio than on the more traditional debt-to-income ratio. Another key feature: The company will lend as little as $75,000.