Buyers Penalized For Making Large Downpayments!
HOME LOANS, INDUSTRY NEWS, TIPS FOR BUYERS
September 14th, 2009
Another example of how messed up our mortgage industry is came to light in a recent article in The New York Times. A policy rule adopted by Fannie Mae and Freddie Mac actually penalizes buyers that make what is normally considered a desirable downpayment of 20% or more. Why? Apparently loans with a lesser downpayment which then require the borrower to pay for mortgage insurance are considered less risky by Fannie/Freddie.
A spokeswoman for Fannie Mae claims loans with mortgage insurance protect the lender from foreclosure losses compared to loans without mortgage insurance. “It’s just a less risky loan from our point of view” Amy Bonitatibus stated. Her spin claims this policy benefits buyersbecause those that stretch to make the larger downpayment don’t need to now and can benefit from lower interest rates despite making a smaller investment.
However, as the journalist points out, even with the lower interest rate, the buyer will have a larger monthly payment because of the higher loan amount and the added mortgage insurance premium. The example used in the article uses a $400,000 purchase price and assumes the buyer has a 720 credit score. A loan broker indicated a buyer with a 20% downpayment would be offered a 30-year fixed rate loan at 4.875%. The same rate would be offered to the same buyer with only 5% down, but this time a mortgage insurance premium would be added to the monthly payment. What’s crazy is if the buyer tenders a 25% downpayment, the interest rate jumps to 5.375%! Why? Again, Fannie Mae and Freddie Mac have deemed loans with 20-25% downpayments the riskiest because mortgage insurance is required.
Generally, the higher the downpayment, the less likely a buyer will walk away from their equity has been the thought process heretofore. Though the article made no mention of what interest rate a borrower with an even larger downpayment would be offered, I would assume the risk factor drops when the downpayment exceeds 30% or more. I would guess this loss risk Fannie/Freddie is concerned about evaporates at some point!
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL ESTATE PROFESSIONALS GMAC
CORNER OF COURT AND PLACER IN REDDING
QUARTER CENTURY LOCAL SALES EXPERIENCE
