Little-Known Way to Save on Foreclosures
Like many other homebuyers who consider buying a foreclosed home, Chad Kinney was disappointed when he learned it would be difficult to get a mortgage for the property he chose.
The Fannie Mae-owned house that he wanted to buy needed repairs and would likely not pass the property inspection required by mortgage lenders, he was told. That's when the listing agent suggested he apply for a HomePath Mortgage, which doesn't require mortgage insurance, a property inspection or appraisal and is offered exclusively to borrowers buying homes from Fannie Mae.
"That was the first time I ever heard of HomePath, so I started researching," he says. "To me, the selling point was my monthly payment is lower and I can get an additional $15,000 for renovations."
Fannie Mae started offering HomePath loans and HomePath renovation mortgages in 2009 to unload the thousands of homes the agency repossesses through foreclosure.
The little-known program has been gaining popularity in recent months, but many buyers are not aware of it and don't understand the pros and cons of HomePath financing until a broker or agent suggest it to them, says Brent Kluge of PrimeLending in Timonium, Md.
How HomePath works
Fannie Mae does not directly lend to buyers. The agency sets the guidelines that lenders need to follow if they want Fannie to buy the loans after they are originated. In the case of HomePath, Fannie allows lenders to finance properties by Fannie Mae with as little as 3% down for buyers who plan to occupy the home and 10% down for investors.
HomePath also offers renovation loans for buyers purchasing properties that need minor or substantial repairs. The financing can be for up to 97% of what the home is expected to be worth after the repairs.
Most lenders require a minimum credit score of 660 for borrowers putting only 3% down, says Juan Rodriguez of Baytree Lending Co. in Chicago.
Potential buyers can choose from about 80,000 homes listed for sale on the HomePath website (HomePath.com). The agency acquires thousands of properties through foreclosure each month, but they sell quickly. In the first three months of the year Fannie sold 62,814 properties, according to a Fannie Mae spokeswoman. Fannie took over 53,549 properties during that period.
Only about 50 lenders nationwide are approved to offer HomePath financing. Most are regional and local lenders.
Advantages of HomePath
One of the advantages of buying a home through Fannie Mae's HomePath is that homebuyers who plan to occupy the house don't have to compete with investors during the first 15 days the property is listed. Fannie prohibits its agents from accepting offers from investors during that period.
Unlike with most other types of mortgages, HomePath financing does not require the property to be appraised, unless the buyer is borrowing money for renovation.
"It's a huge advantage," Rodriguez says. Many deals relying on traditional or Federal Housing Administration financing get killed in the last minute because the appraisal falls short of the sales price, sometimes by small amounts, he says.
The property does not have to go through an inspection. Buyers should always have an independent inspection prior to purchasing a home regardless of what lenders require so they are aware of the property's condition. But knowing that the lender does not have to evaluate and approve the inspection results is one less concern for the borrower, Rodriguez says.
"Typically, we are concerned about credit, capacity (to pay), and collateral," Rodriguez says. "HomePath eliminates the collateral element. Fannie already knows the value and the condition of the property they are selling."
One of the biggest advantages of a HomePath mortgage is that it doesn't require mortgage insurance, regardless of the down payment amount. With conventional loans, borrowers are required to pay mortgage insurance when they put less than 20% down. All FHA loans require borrowers pay for mortgage insurance.
To give you an idea of the savings, a borrower who is buying a $200,000 home with a 5% down payment spends about $150 a month on mortgage insurance with a conventional loan.
HomePath has slightly higher rates
But as Rodriguez points out, "nothing comes free."
HomePath mortgages have slightly higher interest rates. Generally, HomePath rates are about a quarter to half of a percentage point higher than the rates on the conventional loans. However, the cost is offset by the mortgage insurance savings, Rodriguez says.
Some buyers can choose to reduce the interest rate by paying points. That adds to the upfront costs, but Fannie Mae often offers closing cost incentives of up to 3.5% of the purchase price.
"In the end, the interest rate is higher but the mortgage payment is lower," Rodriguez says. That was the case with Kinney. He is buying a home from Fannie Mae in Hampstead, Md., for $165,000 and borrowing about $180,000 through the HomePath renovation mortgage. Kinney says that, based on estimates he was given, his monthly mortgage payments are going to be about $50 less with HomePath than with the FHA loan he had considered before. That includes $15,000 to make the necessary repairs in the house.
"By and large, HomePath is the best loan for a homebuyer to buy and fix up a foreclosure asset today," Kluge says.