Effective June 1, 2008 Fannie Mae has revised down payment requirements for conventional, conforming loans that they will purchase or guarantee. The ratio of home loan to value can be a maximum of 97% for loans written through the automated underwriting system known as Desktop Underwriter. The lower ratio of 95% of loan to value is available for conventional conforming loans written outside of the automated Desktop Underwriting system. This new national policy makes low down payment loans available nationally in areas where home   prices were declining. This means that buyers of owner occupied single-family homes will have a consistent national approach when applying for a conventional conforming mortgage.

Housing sales peaked in 2005 and have been experiencing a pricing decline since. The good news is since the correction, prices are beginning to stabilize and Fannie Mae is seeing lower risk of further significant declines. This new down payment policy that supersedes the former “declining market” provisions means home buyers may not need higher down payments. The new policy also helps assure stability, liquidity and affordability for the housing market which should help those seeking mortgage loans.

Fannie Mae also has streamlined refinancing for borrowers whose mortgage balance exceeds the value of their homes; improved pricing for jumbo-conforming mortgages and undertaken a neighborhood stabilization initiative for targeted areas with high home foreclosures. These policies should help further strengthen the housing market’s long-term prospects.

Anyone applying for a home loan after signing a purchase contract may think that agreeing on the price of the home with the seller means that the sale will close as planned. In fact, the mortgage lender will require that an independent appraisal be done before a loan is approved. The reason is the appraisal value of the home will determine the maximum amount of a mortgage loan. The home value is the only collateral the lender has in the event the borrower defaults on the mortgage. The independent appraiser will review and document other home sales in the area as well as the condition of the home being appraised in arriving at a value. There may be adjustments up or down in arriving at the estimated value of the home. Here are some common facts and myths about appraisals:

Myth: The primary purpose for an appraisal is to make sure the buyer doesn’t pay too much for a home.
Fact:  While the appraisal provides valuable information to the home buyer and seller, the primary purpose of the appraisal is to protect the mortgage lender. Lenders will generally not loan more than the appraised value of a home.

Myth: If the appraisal value of the home is less than the purchase price, the buyer will not be able to purchase the home.
Fact:  The buyer can still purchase the home if the appraisal is lower than the agreed purchase price. The seller can reduce the purchase price and/or the buyer can increase the down payment, which means they will have to borrow less. An escrow account can also be set up and funded for repairs that will increase the value of the home after the repairs are made. In some cases the appraiser may reconsider the valuation if new evidence becomes available to support a higher valuation.

Myth: FHA loan appraisal requirements are much more extensive than non-FHA loans.
Fact:  The appraisal requirements for both FHA loans and non FHA loans are very similar.

Myth: The home buyer cannot see the appraisal report.
Fact:  The home buyer is entitled to a copy of the appraisal report obtained in connection with a loan application so long as the buyer has paid for the appraisal. Your mortgage lender will provide instructions for obtaining a copy.

Myth: A mortgage lender will always require that an appraisal be completed before making a loan.
Fact:  In certain situations, a mortgage lender may not require an appraisal, however a property inspection waiver will be offered at a nominal cost to the borrower.

Myth: A home appraisal is the same as a home inspection.
Fact:  A home appraisal is not a substitute for a home inspection. The appraiser formulates an estimated value of the home for the mortgage lender, while the home inspector determines the condition of the home and informs and educates the buyer about the major structural items and components of the home.

The mortgage industry and banks in particular are reeling as a result of their inability to sell home loans they originated to investors. The concern centers on current economic conditions and declining property values in many markets. Consequently, the Federal National Mortgage Association (FNMA) has instituted specific guidelines to reduce credit and collateral risk to lenders.  

The term “Declining Market” is determined by appraisers and utilizes various data sources including national and local information. If a home is determined to be in a declining market, the maximum home loan amount that can be borrowed is reduced by 5% of the revised appraised value of the home. This simply means that a buyer must increase their mortgage down payment by 5%. The declining market rules are rather subjective, which means that declining markets can be defined within a city or suburb, or even a neighborhood.  

Both home sellers and home buyers should be aware of the ramifications of the declining market adjustment before an offer is made and accepted. An experienced mortgage lender familiar with the declining market underwriting process is essential for a home buyer before an offer is made. 

If your ability to purchase a home with a conventional loan is adversely affected by these changing conditions, NextHome Mortgage has a variety of home loans that can reduce the amount of money required as a down payment. Start your search by visiting our Mortgage Home Loan page.