Fanny Mae

Federal National Mortgage Association, commonly referred to as “Fannie Mae” is a congressionally chartered secondary-mortgage market company that buys loans from private lenders. Because the firm is so big and has been involved in purchasing packages of loans from lenders for 25 years, it has enormous influence on the mortgage market.

Fannie Mae's [Community Home Buyers Program] allows first-time buyers with little cash to obtain 95 percent financing. Participants may put down as little as 3 percent of their own money, with the remainder permitted in the form of a gift from family members, a government program or nonprofit agency. Mortgage insurance is required on all loans above 80 percent loan-to-value ratio when borrowers do not use their own funds for at least 5 percent down.

The program is administered through participating lenders, and there are income limits in different states. However, the income restriction is waived when borrowers participate in the Fannie Neighbors program. Fannie Neighbors also has lower income requirements for borrowers who want to buy in designated central cities. Fannie Mae's Community Home Buyers program has an income cap of 120 percent of the area's median income. In addition, the borrower must attend a seminar on home ownership and the home buying process. It is not geared only for first-time homebuyers, unlike many of the other low-down -payment programs on the market.

Fannie Mae is expanding the availability of low-down-payment loans in an effort to help more people nationwide qualify for a mortgage. Two new programs will help potential buyers overcome two of the most common obstacles to home ownership, low savings and a modest income.

To address many first-time buyers' struggles to save the down payment, Fannie Mae developed Fannie 97. The program provides 97 percent financing on a fixed-rate mortgage with either a 25- or 30-year loan term through Fannie Mae's Community Home Buyers Program.

Fannie Mae's Start-Up Mortgage assists buyers with a 5 percent down payment who are at any income level. Yet applicants do not need as much income to qualify and less cash for closing than with traditional mortgages. Borrowers receive a 30-year, fixed-rate mortgage with a first-year monthly payment that is lower than the standard fixed-rate loan. Freddie Mac, Fannie Mae's counterpart, also offers low-down-payment loan programs.

For a list of participating lenders, call Fannie Mae at (800) 732-6643.

Alternative (A,B,C,D) Loans

Traditional lenders who offer conforming loans are extremely competitive. They must offer desirable terms or lose their share of the market. Meanwhile, hopeful home buyers who were rejected often turn to mortgage brokers and specialized mortgage lending businesses. Alternative lending sources not only offer a variety of loan products but also are more willing to deal with higher debt-to-income ratios, credit problems and other credit challenges.

In cases where negative information on a credit report may be due to disappear in the next few years, or a borrower expects their income to increase significantly, non-conforming loans without excessive prepayment penalties can be excellent. The borrower can obtain a conventional loan as soon as they qualify, yet enjoy the benefits of home ownership and establish equity in the meantime. Many homebuyers engaged in this process look at these unconventional loans as a penalty while others are grateful for a second chance.

Easy-Qualifier Loans (No-Doc Loans)

Generally, lenders will not make loans to unemployed persons because someone without an income would seemingly have no way of making monthly mortgage payments. However, there are home loans for which lenders require very little loan documentation as long as the borrower puts down a sizable down payment, generally 25 percent or more. These "no-doc" loans are common among self-employed people who say they earn a certain amount of money but whose income tax returns show that their earnings are much lower. Borrowers should check directly with lenders when seeking a no-doc loan.

Negative Amortization

Negative amortization occurs when the monthly payments on a loan are insufficient to pay the interest accruing on the principal balance. The unpaid interest is added to the remaining principal due. When home prices are appreciating rapidly, negative amortization is less of a possibility than when prices are stable or dropping, particularly for the borrower who has made a small cash down payment to begin with. The combination of negative amortization and depreciation in home prices can result in a loan balance that is higher than the market value of the home. Adjustable rate mortgages with payment caps and negative amortization are usually re-amortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess.

Balloon Mortgage

A Balloon Mortgage is a loan in which the entire unpaid principal becomes due and payable on a given date, five, ten, or any number of years in the future. The borrower must pay up, refinance, or lose the property. Interest rates on balloon mortgages are lower than for fixed-rate mortgages. So the monthly mortgage payments will be lower than the monthly payments for conventional mortgages.

Low-Cost Loans

There isn’t really such a thing as a low-cost loan. The term “no-cost” loan is misleading because borrowers are actually paying a higher interest rate in exchange for not having to pay fees or closing costs up front when the loan is secured. While some lenders may promote “no-cost” loans, regulators have tightened restrictions on this. Advertised "no-fee" loans may actually cost the borrower more because these costs are rolled into the new note through higher interest or more principal.

A typical no-fee loan is one in which the points charged and all fees are included in the loan principal, meaning that the borrower does not pay these expenses at the close of escrow, but instead ends up paying them over the life of the loan. The loan is called a no-fee loan because the borrower is not charged any fees up front.

A “no-points” loan is one that the lender does not charge points (one point is equal to 1 percent of the loan amount). But there are other fees involved in no-point loans, as with most loans.

 
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