By: Mary Ellen Podmolik
April 6, 2014
New efforts are being taken to make it easier for homebuyers, particularly first-timers and those who were burned during the recession, to buy a home.
Illinois' state housing agency is tweaking a current initiative to boost the amount of down payment assistance and offer fixed-rate mortgages with below-market interest rates to eligible buyers.
Meanwhile, two mortgage lenders recently announced they were lowering the minimum FICO credit score required for Federal Housing Administration-backed mortgages.
The moves are among the latest attempts to jump-start the lower end of the housing market. Maybe it was a job loss that made it hard to pay the bills and sent credit scores spiraling down. Maybe it was a student loan that made it hard to set aside funds for a down payment. Whatever the reason, the housing market has been short on entry-level buyers, and without that key segment, move-up buyers can be vexed in their attempts to sell one home so they can buy another.
First-time buyers in August accounted for 17 percent of sales, according to the most recent data available from the Illinois Association of Realtors. That compares with more than 30 percent of buyers just before the housing market's bubble burst, and a share just over 20 percent during more normal times.
With the worst of the housing recession behind the country, home price gains and increased consumer confidence are drawing people back into the market.
Instead of devoting almost all their time to foreclosure prevention, housing counseling agencies are again working to make their clients more financially literate and better prepared for the costs associated with buying and keeping a home.
"We want them to be informed homebuyers and not bamboozled," said Derrick Anderson, associate director of Northside Community Development Corp. "Every homebuyer, no matter their income or situation, needs to investigate all their options."
Illinois' program, called Welcome Home Illinois and administered by the Illinois Housing Development Authority, is similar to what the state has called its flagship mortgage assistance program, SmartMove.
This time around, it offers first-time buyers or consumers who haven't owned a home in three years a $7,500 forgivable loan, versus $6,000 under SmartMove that can be used toward a down payment or to help with closing costs.
Designed for people who want to buy a single-family home or two-flat to use as their primary residence, it also offers a below-market interest rate, initially 3.99 percent, on a 30-year, fixed-rate mortgage. Average mortgage rates on that popular loan product have trended closer to 4.40 percent recently.
Participants must contribute at least 1 percent, or $1,000 of the purchase price, whichever is greater, and there are maximum household income and purchase price limits.
Eligible buyers must have a credit score of at least 640. The widely used FICO credit scoring system has a range of 300 to 850.
There's evidence that consumers with lower credit scores are gaining better access to mortgage credit. In February, the average FICO credit score for approved FHA-insured loans (a popular choice for first-time buyers because of the low down payment requirement) was 669, the lowest it had been in more than two years, according to Ellie Mae data.
Still, initiatives have been announced recently to help consumers with even lower credit scores secure FHA loans.
Wells Fargo has lowered to 600, from around 640, the minimum credit score it would accept for FHA loans. But the lender is not returning to the subprime days that helped spark the housing crisis.
"All loan applications are fully underwritten and documented, and borrowers must demonstrate ability to repay," said Vickee Adams, a Wells Fargo spokeswoman. "For all borrowers, including those with lower credit scores, we expect that they will be able to explain any credit issues to the underwriter, and that they will provide additional information to document their ability to repay."
More recently, Carrington Mortgage Services said it would target what it saw as "underserved" homebuyers by lowering its minimum FICO score requirement to 550, and it has altered its mortgage loan product offerings to serve what it said was the large population of potential homebuyers with lower credit scores.
Other lenders, while not making broad announcements, said they are considering borrowers with lower credit scores on a case-by-case basis.