Q & A : Loan Rules Can Be Bent for Some Home Buyers

The Federal National Mortgage Assn., a major force in the residential mortgage market, recently said it will commit $1 trillion to help finance low-income and minority housing over the next six years--the biggest single commitment of its type ever.

Fannie Mae, which has already helped to finance more than 10 million home purchases, says it will reach out to renters, recent immigrants and central city residents who in the past have been ignored by the major mortgage lenders.

How can you tap the agency’s largess, and what should you expect to receive if you do? Here are some answers:

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Q: What is Fannie Mae doing, and how will it help me buy a home?

A: The agency has a national “community home buyers” program that does three things. It lowers required down payments to as little as 5% of the price--and up to 2% of the down payment may be borrowed elsewhere or received as a gift by the buyer. It raises another key lending guideline, the “housing expense-to-income ratio,” so that a buyer can qualify for a bigger loan than his or her income ordinarily would allow. And it establishes a review board that will take a second look at loan rejections.

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Q: What does that mean in dollars and cents?

A: If you wanted to buy a $70,000 house, you would normally have to earn more than $30,000 and have roughly $8,400 cash to close the deal, including down payment, closing costs and “mandatory cash reserves.”

Under the community home buyers program, you could qualify for the loan with an income of $25,782. And the amount of cash required to close the loan would be just $7,000, according to Fannie Mae. Additionally, a portion of your down payment could come from a “soft second,” which is a loan from a state or city housing agency.

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Q: Where would I find a soft second?

A: Look in the phone book for housing assistance agencies, or ask a lender or loan counselor. Most major cities have at least one agency that makes loans of this type to low-income families that are attempting to buy their first homes.

In Los Angeles, for example, you’d call the Los Angeles Housing Department. Some community groups, such as Los Angeles Neighborhood Housing Services and Community Build, are also working closely with Fannie Mae, says Scott Van Dellen, a Fannie Mae official who concentrates on low-income housing.

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Q: What is the purpose of the review board?

A: Its aim is to ferret out discriminatory rejections--loans that could have been approved if the lender had used slightly more flexible lending guidelines. (All lenders have some flexibility in accepting or rejecting borrowers who don’t meet certain strict criteria, but a Federal Reserve Bank of Boston study found that lenders were more likely to be flexible when the applicant was white.)

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Q: How do I apply for one of these loans?

A: The first step is to call (800) 7-FANNIE and request an information packet. The information packet will include a booklet called “Opening the Door to a Home of Your Own,” which includes a self-test to help you figure out whether you’re likely to be accepted.

The packet also includes the names of participating lenders. (Fannie Mae does not make loans directly to consumers; it works through banks, savings and loans and mortgage banking companies such as Countrywide Funding and Fleet Mortgage.) Once you’ve determined that you’re a good prospect for the Fannie Mae program, you simply can visit or call one of the lenders identified in the packet and tell them you want to get a loan through the Fannie Mae community lending program.

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Q: How about the interest rate?

A: Interest rates would vary, depending on the lender, market conditions and whether you choose a fixed-rate or adjustable-rate loan. Current conforming loan rates start at about 5% for an adjustable-rate loan and at about 8% for a fixed-rate loan. (You can get a lower rate if you pay points--an up-front fee calculated as a percentage of the loan amount.)

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Q: What would make me a good prospect for Fannie Mae’s community lending program?

A: Generally speaking, you must be a good credit risk, which means you usually pay your bills promptly and don’t have major negative items--such as bankruptcies and foreclosures--in your credit history. You also need a steady source of income, but under this program that doesn’t necessarily mean a long time spent at the same job. In other words, if you’ve switched jobs frequently but have maintained roughly the same--or rising--wages, the changes won’t be counted against you.

Finally, for the community lending program, you generally can’t earn more than 115% of the median income in your area. And your loan amount can’t exceed $203,150--unless you’re buying a home in Hawaii, where lending limits are substantially higher.

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Q: How do I find out the median income in my area?

A: Fannie Mae provides its lenders with a booklet giving median household incomes and community lending limits for more than 500 cities. When you visit a lender to ask about the program, you can ask to see the median income in the city where you live (or the city closest to you).

The median income is $44,600 in the Los Angeles and Long Beach metropolitan area; it is $56,500 in the Anaheim-Santa Ana area.