Approximately 85% of FHA loans are for first-time homebuyers.
In contrast, about 50% of Fannie Mae’s and Freddie Mac’s “conforming loans” are for first-time homebuyers.
As a quick reminder, FHA loans only require 3.5% down – and they are much more flexible with respect to debt ratios, credit, and other underwriting criteria.
Fannie Mae and Freddie Mac allow some buyers, under specific income limits, to put only 3% down, but many first-time buyers still don’t qualify and end up going the FHA route.
Fannie Mae made a huge effort a few months ago to make life easier for first-time buyers by waiving ALL of the “rate increases” that most first-time homebuyers used to experience for things like a lower down payment, a lower credit score, or a condominium purchase.
But – waiving the rate increases for first-time homebuyers was not enough – so now Fannie and Freddie both are trying to lure in even more first-time homebuyers.
They are doing so by making rates even lower for weaker homebuyers (with smaller down payments or lower credit scores) AT THE EXPENSE OF STRONGER BUYERS, as rates are going up for stronger buyers.
This of course makes no sense from a credit perspective, as stronger buyers are typically rewarded with better terms than weaker buyers because they represent less of a risk.
But Fannie and Freddie are not like normal lenders, as they are pretty much just “government” now, and thus not subject to the normal rules of lending.
Their goal is laudable, but not at the expense of stronger borrowers.
So – now every lender with pre-approved borrowers in their pipeline has to go back to all of their stronger borrowers and say… “uhhhh, sorry, your rate just went up because you are too well-qualified.” I am sure that will go over well.
Dave Stevens is the former longtime CEO of the Mortgage Bankers Association, and he probably knows more about mortgage banking than anyone. He recently posted a great article on LinkedIn that discusses this in much more detail, pointing out some of the other logic discrepancies as well and making it clear that these changes will not achieve the desired result.
Here is Mr. Stevens LinkedIn article – in case anyone is interested.
Long story short: Conforming interest rates are going up for many strong borrowers and it makes no sense at all.
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