Zero-Down Mortgages Help Police, Firefighters, Teachers, Healthcare Workers

10/4/2005

Until now, veterans were about the only people who could get great deals on zero-down-payment mortgages. Others seeking zero-down loans normally had to pay higher interest rates and have squeaky-clean credit histories.

Now, police officers, firefighters, teachers and healthcare workers can move into a house with as little as $500, thanks to Freddie Mac's new Home Possible mortgage programs.

We've just added some credit flexibility and made it a bit easier for certain people with limited savings and maybe a few marks on their credit histories, or maybe low credit scores, says Brad German, public relations manager for Freddie Mac, in McLean, Va.

It makes sense that community workers nationwide, whose pay scales normally rank in the low-to-moderate range, can get financial help buying a home, much like veterans do. There already are some special FHA programs for teachers and police officers, but this is the first one designed to help an expanded group of community servants obtain conforming mortgages.

The new program will help fill a gap in the housing system and strengthen neighborhoods by making homeownership possible for cops, teachers, firefighters and healthcare providers in the communities they serve," says Bart Harvey, chairman and CEO of the Enterprise Foundation, a community development organization.

There actually are several different programs, all with similar basics. One is aimed at people who want to buy manufactured housing. Another is for people who want to buy multi-family dwellings such as duplexes, triplexes, and quads. Buyers also can get a 15- or 20-year mortgage instead of a standard 30-year loan, as well as adjustable-rate mortgages (ARMs).

Even though it's a Freddie Mac program, the actual mortgages come from the more than 2,000 lenders and 10,000 mortgage brokers who use Freddie Mac's automated loan processing software, Loan Prospector. Like Fannie Mae, Freddie Mac buys mortgages from lenders. Fannie Mae buys roughly one out of every four conventional mortgages loans issued in the United States today, while Freddie Mac buys one of every six. Together, their buying power gives them the clout to set and change loan standards.

Freddie Mac is changing the Debt-to-Income (DTI) ratios for Home Possible applicants. And it is letting them buy down the interest rate for the first three years of the loan, i.e., pay money upfront in exchange for a lower interest rate that results in lower monthly payments during the mortgage's first few years.

On the other hand, it also is requiring that applicants earn more than the median income for the area where they want to live. Buyers also must take a borrower education program before they apply because the agency's research shows that taking classes in home ownership reduces the odds that people will get into mortgage trouble.

One of the most important aspects of the program is the more-flexible DTI, which is the ratio of your debt to your income. Most lenders reject borrowers who must earmark more than 40 percent of their gross income to pay their monthly debts. With Home Possible, the DTI can be as high as 45 percent. The program's other major aspect -- the interest buy-down provision -- can help applicants lower the initial years' interest rates, so they can qualify to buy more-expensive houses than they otherwise could purchase.

When you come to the closing table you can bring some buy-down money that will let you temporarily reduce your interest rate by as much as 1.5 percent for the first year, and a half a percent for the next two years, Freddie Mac's German explains. If, for example, your interest rate is 5.75 percent, you can buy it down to 4.25 percent for the first year. In the second and third years it would be 5.25 percent. In year four it would go to 5.75 percent, and stay there for the life of the loan.

The amount of money it costs to buy down the mortgage can vary widely, depending on the size of your loan and the interest rate. Once you've arrived at a figure, you can fund it from savings, a gift from relatives, or a grant from a community group or agency. Remember that any buy-down payment is in addition to the $500 you might have to pay for closing costs.

Here's how the buy-down works. Pretend the lender says you are qualified to make a $1,000-a-month basic mortgage payment. That's interest and principal, but it does not cover taxes, insurance, assessments, or other fees. If you could get the 5.75-percent interest rate, you would qualify for a 30-year loan of about $171,000. If you were not making a down payment, a house costing $171,000 would be the most house you could afford.

But if you were to buy down the interest rate to 4.25 percent, you would qualify to borrow about $203,000, or 19 percent more. In some cases, German says buyers can increase their home-buying power by as much as 30 percent. The lender agrees to a buy-down because he or she assumes your income will rise and you will be able to afford to make higher payments by the time the fourth year rolls around.

Let's look at the same figures as in the above example. If you borrow $203,000, your basic monthly payment will be about $1,000 for the first year at 4.25 percent. In years two and three, the rate will jump to 5.25 percent, which would require a monthly payment of about $1,120 -- an extra $120 a month. At year four the rate would jump and then lock at 5.75 percent, which would leave you with a payment of about $1,180.

By using more-flexible terms, Freddie Mac's Home Possible program packs a financially and socially responsible punch for the police officers, firefighters, teachers and healthcare workers who serve their communities at home, day in and day out. Like veterans of the armed forces, they also deserve a little extra help in getting homes of their own.