Why 3% Down Mortgages Alone Won't Revive Housing

In the world of mortgage financing there is stuff that's seen and stuff that's not. Lowering down payment requirements from 5% to 3% will surely help some prospective buyers. However, in a world with roughly 4% interest rates and average sales prices that remain 11% below their 2005 peak, down payments are not the only issue to solve.

The government-sponsored enterprises have begun to accept loans with 3% down, but they're not just any old 3% loan. The GSEs want something more, and that "something" is 18% mortgage insurance coverage.

Combine the 3% down payment and the 18% insurance requirement, and Fannie Mae and Freddie Mac are following long-time industry standards by requiring at least a 20% cushion in case something goes wrong.

And while mortgage insurance is a burden, the bigger obstacle to focus on, according to a RealtyTrac home affordability analysis, is non-household debt.

In 92% of the counties analyzed, payments on a median-priced home required less than 43% of median household income, which is the maximum debt-to-income ratio allowed for a qualified mortgage by the Consumer Financial Protection Bureau.

Add in the typical student loan debt and car payment, and less than half — 48% — of U.S. housing markets are affordable for median-income earners using the 43% DTI.

Additionally, the standards for 3% loans is hardly straight-forward, meaning they are not for everyone.

For instance, Fannie Mae's MyCommunityMortgage program is only available if at least one borrower is a first-time home buyer who has completed pre-purchase education and counseling. The loan must have a fixed rate and be secured with a one-unit principal residence — meaning that duplexes, triplexes and quads are off limits. Manufactured housing is also ineligible. However, gifts can be used to bulk-up reserves, a new wrinkle. The program can also be used to refinance existing Fannie Mae loans and cash-out refinancing is also allowed.

read more: www.nationalmortgagenews.com/news/origination/why-3-down-mortgages-alone-wont-revive-housing-1057171-1.html