Fannie Mae recently unveiled new rules that allow more borrowers to qualify for a mortgage. The change is aimed at encouraging homeownership among creditworthy lower-income and minority homebuyers, Fannie says in a press release.
Credit for nontraditional income sources
In a departure from traditional lending standards, Fannie’s HomeReady mortgage rules mean that if your income isn’t enough to get a mortgage you also could count the salary of an employed child, a parent or another relative who lives with you but whose name is not on the mortgage loan. (Check out “7 Tips to Help You Get Your Mortgage Application Approved” for help with applying for a mortgage.)
Parents and other relatives have been able to help their children buy a home in the past, but in different ways — by co-signing the mortgage, for example, or by giving them money to help with the down payment. (Zillow explains the rules for using gift funds toward your down payment.)
“For the first time, income from a nonborrower household member can be considered to determine an applicable debt-to-income ratio for the loan, helping multigenerational and extended households qualify for an affordable mortgage,” the press release says. Qualified borrowers can get a HomeReady mortgages with down payments as small as 3 percent.
Rental income counts
You also are allowed to count rental income from a boarder or someone renting an apartment attached to your home. Fannie did not say so, but, presumably, income from a nonrelative like a live-in partner to whom you are not married might also meet this standard.
In another break from tradition, you also can include income from someone who doesn’t live in your household — a parent or a grown child, for instance — to qualify for a mortgage.
To get a HomeReady mortgage, borrowers need to complete an online education course called Framework, which currently is available for anyone to take for $75. Framework was created by the Housing Partnership Network and the Minnesota Homeownership Center.
Check with lenders in your area or online to learn if and when they’ll be taking applications for HomeReady mortgages. By late this year Fannie’s new guidelines will be incorporated into a software program, Desktop Underwriter, used by lenders to screen and qualify mortgage applicants, the press release says.
Eligibility also is keyed to certain low-income census tracts. More information about the program from Fannie includes:
- A fact sheet for lenders.
- Income and location eligibility information.
- State maps showing eligible census tracts.
Multigenerational households are on the rise
By recognizing income from multigenerational households, Fannie may simply be acknowledging the new normal in many American homes. In 2012, nearly a fifth of Americans were living in multigenerational households — double the number from 1980, says the Pew Research Center.
Race, ethnicity and immigration play a big role in the change. In minority households, especially, it is not unusual for many members — primary family, relatives and boarders to live together and contribute to the household’s income.
In 2012, Pew says, 11 percent of American families were multigenerational (with at least two generations of adults). Here’s the breakdown:
- African-American: roughly 25 percent.
- Hispanic: roughly 25 percent.
- Asian-American: 27 percent.
- White non-Hispanic: 14 percent.
For family and business
Since the housing market is a key component of the American economy, it makes economic sense for Fannie Mae to encourage first-time homebuyers to get into the housing market. Without vigorous buying and selling of homes the whole economy lags.
“Because of their critical role in creating and sustaining a strong housing market, first-time buyers have long been an important focus of housing policy,” says an Urban Institute analysis paper, “A Closer Look at Data on First-Time Homebuyers.”
The question is: Is it safe for Fannie to loosen lending standards, given how the recent housing crash was fueled in large part by lax lending standards. Critics like Edward Pinto, housing expert at the American Enterprise Institute’s International Center on Housing Risk, tells The Wall Street Journal that he thinks Fannie’s move is risky:
Mr. Pinto said income from sources such as boarders is difficult to verify and that he hasn’t yet seen evidence that income from nonborrower occupants is stable enough to be safely counted when underwriting a mortgage.
But Jonathan Lawless, vice president of Single Family Analytics and Affordable Housing Strategy at Fannie Mae, says the change is backed up by research. Lawless tells Marketplace:
“Fourteen percent of households that have a mortgage have an income-earner of significant income living in the same household,” Lawless says. “That percentage is 19 percent for African-American households and 24 percent for Hispanic households.”
What’s Fannie Mae?
Fannie doesn’t make loans. It is a government-sponsored corporation that buys mortgages made by lenders in a so-called “secondary mortgage market.” If you have taken out a mortgage from one bank and now your payments must be made to another bank, your loan probably was sold in this market. Fannie buys only loans that meet its requirements, which gives its rules a lot of clout.
By offering to buy lenders’ mortgages, Fannie allows them to profit from loan fees and then unload the loans, putting their money back to work making more home loans. The cycle keeps lenders making more mortgages, which puts more homes into borrowers’ hands, the government’s object when it founded Fannie Mae (the Federal National Mortgage Association) in 1938.