A new mortgage product will be available to borrowers later this year, one which represents the first step toward recognizing a widespread reality, the fact that many home purchases in America fall outside the outdated norm of one house, one family — and one family’s income to qualify to buy.
But the particulars of this new mortgage product may keep it from living up to its promise.
If you get money from boarders, roommates or accessory apartments the new “HomeReady” program from Fannie Mae seems like very good news.
The reason the Fannie Mae program is so different is that lenders have traditionally refused to recognize income from roommates and boarders except in very restricted circumstances.
For example, Federal Housing Administration (FHA) guidelines say that income from roommates can’t help borrowers qualify for a mortgage. The story with boarders is different: Money from a boarder counts but only if the boarder is “related by blood, marriage or law.” The U.S. Department of Veterans Affairs (VA) has an even stricter policy for loans it backs: it simply won’t count income from boarders or roommates when qualifying borrowers.
There is some practical basis to these restrictions: Many communities use zoning to ban in-house apartments, the income from boarders and roommates may not show up on tax forms and thus can be difficult to verify, and money from home sharing is traditionally not regarded as stable and ongoing.
The catch is that these very problems also apply to boarders and roommates related by blood, marriage and law and yet income from family members somehow counts when applying for a mortgage — at least under the FHA rules. Family dynamics being what they are, why income in one case can help borrowers get a mortgage while income in the second cannot seems like an unjustifiable distinction.
Not only do we have boarders, roommates and accessory apartments to consider, we also have to deal with the reality that more than 21 million adult children aged 18 to 31 live with their parents. According to the Pew Research Center, 16 percent of all adults between the ages of 25 and 31 remain at home and some of them likely chip in each month to pay household costs. Should that money be counted in a loan application?
Alternatively, as of 2011 about 4.6 million parents were believed to have moved in with adult children, according to AARP. That’s up 13.7 percent from 2008, when 4.05 million parents were living with an adult child. One can reasonably ask, can parental dollars used to defray household expenses be counted when computing qualifying income?
How It Works
Now, finally, there’s an effort to align mortgage standards with housing realities: Fannie Mae has announced that it will soon offer the new “HomeReady” mortgage product, a loan with as little as 3 percent down.
“For the first time,” says the company, “income from a non-borrower household member can be considered to determine an applicable debt-to-income ratio for the loan, helping multi-generational and extended households qualify for an affordable mortgage.”
Okay, but what about those long-standing restrictions related to non-family members? It turns out that such traditional limitations are hokum.
“Research indicates that these extended households tend to have incomes that are as stable or more stable than other households at similar income levels, positioning them well for homeownership,” said Fannie Mae.
The HomeReady program will allow mortgage applicants to include income from non-occupant borrowers such as parents as well as in-house rental payments from such things as basement apartments.
Here’s The Catch
This is a huge break with past industry practices but the catch is that the HomeReady program will not be universally available, instead borrowers must meet income and census tract standards:
First, the HomeReady mortgage is only available “to borrowers at any income level for properties in designated low-income census tracts.”
Second, the program is open “to borrowers at or below 100 percent of area median income (AMI) for properties in high-minority census tracts or designated natural disaster areas.”
Third, “for properties in remaining census tracts, HomeReady borrowers must have an income at or below 80 percent of AMI. Approximately half of census tracts will be subject to the 100 percent AMI limit or have no income limit.”
Lack of Motivation for Lenders
Fannie Mae doesn’t originate loans, it sets standards and then offers to buy mortgages which meet its benchmarks. Unfortunately, HomeReady restrictions will severely restrict the program’s use. Here’s why:
Lenders like to make big loans and reap big fees, thus the popularity of jumbo financing. Under Dodd-Frank fees and points are restricted to 3 percent of the loan amount — but only for loans of $100,000 or more. Lenders can charge more for smaller loans, but the total number of dollars involved for such financing is limited and with their income restrictions HomeReady mortgages will be on the smaller side.
That’s a concern because figures from the FHA demonstrate that lenders are unlikely to market smaller loans. As an example, even though the FHA provides 100-percent protection for lenders if an insured mortgage goes bad, in 2014 fewer than 5 percent of all FHA loans went to borrowers with credit scores below 620 and just 0.02 percent went to borrowers with credit scores under 580.
A huge HomeReady problem involves income verification, something required under Dodd-Frank’s ability-to-repay rules. If Smith has a home, rents out the basement, has checks for the past 12 months and reports the income to the IRS then there should be no problem. But what if Jones wants to buy a house with income from Thompson, a potential basement renter? Does the lender count the possible income represented by Thompson? All of it or some of it? What happens if Thompson decides not to move? Thompson is neither a borrower nor an owner and until the property is purchased he isn’t even a tenant.
The probability is that the HomeReady program will have little or no marketplace impact, but that’s not to say the idea is bad, merely that as it’s currently written lenders are not likely to be too enthralled. Alternatively, HomeReady can be as a first-step toward a broader program, one allowing all borrowers to use income from boarders and in-house tenants to bulk-up the qualifying income needed for a loan approval.
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