Good Borrowers, Better Loans: New Legislation Eases Credit Crunch

We’ve all seen it. In recent months, even borrowers with good credit have become caught up in the credit crunch. The lenders, Fannie Mae and Freddie Mac have all tightened their lending restrictions. Some of this – such as the elimination of the all-too-easy credit that got us into this mess – is a good thing and will help to correct the housing market.

Yet some of it appears overly restrictive to observers, and passes the risks within the market along to good borrowers. For instance, in new condominium buildings that are not yet FHA-approved, some lenders have been requiring 10% or 15% down before they’ll provide a loan. These types of restrictions eliminate otherwise qualified buyers who have a 3% or 5% down payment in hand – the very type of good buyers that will help the housing market to right itself.

However, the Housing and Economic Recovery Act of 2008, a bill recently passed by Congress, will make it easier for good borrowers to get good loans.

Perhaps the biggest thing, beyond the $7,500 tax credit, is that FHA insured loans are getting cheaper. The FHA rates are more competitive with typical bank rates, the required down payment amount is 3.5%, and the mortgage insurance amount for those buyers that are putting down less than 20% (most of the market) is significantly cheaper than a conventional loan. Overall, this will make it cheaper and easier for buyers to get financing.

Other improvements that are taking place as a result of this legislation include:

• The elimination of seller-funded down payment assistance programs (which helped to facilitate increased foreclosures and other problems)

• Simplification of condominium project approvals (it will be easier for a buyer to get a good loan when buying a new condo)

• Higher mortgage loan limits (qualified buyers purchasing properties up to $271,050 can go FHA – providing them with a better financing option with lower mortgage insurance and 3.5% down payment requirement)

For more information, please click here.

To read the bill (HR.3221), please click here.