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Freddie Mac 97 percent loan unveiled with NO income restrictions

Gina Pogol
Gina PogolThe Mortgage Reports Contributor

New Freddie Mac 97 percent mortgage

HomeOne, a new Freddie Mac 97 percent loan program, begins on July 29, 2018. It’s a big deal because:

  1. Only 3 percent down
  2. NO income limits
  3. NO geographic restrictions (you don’t have to buy in a low-income census tract)

Compared to FHA loans, HomeOne may be a better fit for many buyers.

Verify your new rate (Oct 15th, 2018)

New and improved Home Possible

Freddie Mac’s Home Possible program, instituted about three years ago, increased the availability of conventional (non-government) financing to buyers with small down payments. However, the minimum down payment was 5 percent for most applicants.

Only those who qualified for Home Possible Advantage could apply for a Freddie Mac 97 percent loan. And that meant meeting income restrictions that depended on the local cost of housing. Danny Gardner, a senior vice president with Freddie Mac, said in a National Mortgage News interview that the program had some problems.

For example, a loan could be derailed by a lender finding extra income that would make a borrower ineligible. In other cases, spouses whose income would push the application over the limit would have to be left off the loan, and that caused problems.

“That caused a level of complexity for lenders and consumers to understand those nuances,” Gardner said. “By having a more broad-based product where the metric is whether or not you are a first-time homebuyer makes those other if/then statements obsolete and lenders can be more confident promoting an option for borrowers.”

How does Freddie Mac define “first time home buyer?”

This guideline is actually pretty generous. You may be eligible for HomeOne even if you owned a home in the past. Here’s what can make you eligible:

  • You have had no ownership interest in a residential property during the three-year period before buying a home
  • Displaced homemakers or single parents may qualify if their only homeownership in the last three years was joint with a former spouse and the home was their primary residence

For millennials and other first-time buyers, these loan down payment alternatives to FHA is increasing their ability to purchase homes.

HomeOne vs FHA

While FHA mortgages have flexible underwriting guidelines and require just 3.5 percent down, they come with several drawbacks.

  • FHA home loans require an upfront mortgage insurance premium (MIP) of 1.75 percent of the loan amount. This amount can be wrapped into the mortgage
  • FHA also imposes annual mortgage insurance, which is divided by 12 and added to the monthly payment. The insurance premium ranges between .80 and 1.05 percent for a 30-year loan, regardless of credit score.
  • FHA mortgage insurance cannot be canceled regardless of how much you pay down your balance or how much your property appreciates. You have to refinance to cancel it

On the other hand, HomeOne is not the best for every applicant.

  • Manufactured homes won’t qualify
  • Program must be a fixed-rate loan
  • No cash-out refinancing
  • So-called “super-conforming” loans with higher amounts won’t qualify. In more expensive areas, the loan limit for FHA mortgages is higher than the conforming limit for HomeOne
  • FHA loans can be underwritten manually, so you may qualify even without a credit score. HomeOne won’t allow that

If HomeOne doesn’t work for you, you may want to consider coming up with 5 percent down and avoiding the FHA insurance. Have a trusted lender run the numbers and see what’s more affordable for you.

Qualifying for HomeOne Freddie Mac 97 percent financing

To be eligible for HomeOne:

  1. At least one borrower must be a first-time homebuyer
  2. The property must be a one-unit primary residence
  3. You need at least 3 percent for your down payment

Freddie Mac may consider you a first-time homebuyer even if you have owned property before. If all buyers are first-timers, at least one will have to complete an approved homebuyer education.

However, when you apply for a mortgage program, you don’t just have to be eligible. Eligibility means you are allowed to apply for the loan. Qualifying for the loan means you also meet the lender’s guidelines — credit history and score, assets and income, for instance.

In addition, you must have a usable credit score that will allow the lender to underwrite the loan using Freddie Mac’s automated system. The software will either accept or reject your application, and it only takes a few minutes.

If you get an “accept” recommendation, and your documents match your income and asset information in the application, you can use the program. If your application requires manual underwriting, you are not eligible for HomeOne.

Finally, the property must also meet the lender guidelines and the appraisal must be acceptable to the lender.

Verify your new rate (Oct 15th, 2018)