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Published: Sunday, 12/25/2011

Misinformation making many miss home-buying programs

BY KENNETH R. HARNEY
WASHINGTON POST WRITERS GROUP

WASHINGTON -- Lack of accurate information about the availability of loan programs to address special needs is discouraging far too many consumers from even considering an application, much less shopping around, lenders and economists say.

Alex Stenback, a mortgage banker in Minnetonka, Minn., said, "People just aren't aware of what's possible right now" and as a result are missing real estate prices and long-term interest rate opportunities they shouldn't.

For example, what's needed for an acceptable down payment? Is it 20 percent? Ten percent? Less? Yes, it's less -- and potentially a lot less for those who qualify for the right program.

The widespread belief that banks require a minimum 20 percent down payment for conventional loans may have arisen from media coverage this spring and summer of a controversial proposal by federal agencies calling for borrowers to put down that much if they want to get the best interest rates and lowest fees.

Also contributing to incorrect beliefs about down payments: The Obama Administration floated the idea of a phased-in move to 10 percent up-front cash for all loans eligible for purchase by mortgage giants Fannie Mae and Freddie Mac, which together dominate the conventional home-loan sector.

But neither the 20 percent nor the 10 percent plan has been adopted, and the odds are remote that either one will move forward in 2012. Fannie and Freddie's standard minimums are still 5 percent with mandatory mortgage-insurance coverage.

Buyers with little or no cash to put down have multiple options. FHA requires just 3.5 percent down on its insured mortgages. Other programs permit no down payment and even finance more than the price on the house when fees are rolled into the mortgage, provided the buyer fits into an eligibility niche.

Veteran or active members of the military can get a zero-down VA-guaranteed mortgage. And the VA allows the seller to pay loan fees and closing costs provided they don't exceed 6 percent of the house price.

No-down-payment purchases are permitted in the many communities with populations below 20,000 that are eligible for mortgages guaranteed by the U.S. Department of Agriculture.

What about credit? Haven't lenders been pushing up minimum FICO scores into the mid-700s and rejecting applications with lower scores outright? Although most lenders doing FHA loans require minimum scores of 620 to 640, a few of the biggest FHA originators will accept scores down to 580.

And how about debt-to-income ratios? Aren't they tighter than ever? Lenders say that when loan applications go through the "automated underwriting" systems used by Fannie, Freddie, and FHA, borrowers with total monthly debt levels of 45 percent to 55 percent of household income -- well beyond the posted limits -- frequently are approved if they have positive compensating information elsewhere in the application.



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