The Family Opportunity Mortgage from Fannie Mae, allows you to purchase a home for a loved one while enjoying many of the same benefits as a loan on a single-family owner-occupied property.
Many people across the country, including right here in San Diego County, want to purchase a home for an elderly parent, a disabled child, or a child attending college. However, because you are not purchasing a home for yourself, people were previously forced to use investment loans to make these purchases.
For a variety of reasons, loans on investment properties have higher rates of default and foreclosures. This is largely because the owners don’t have an emotional attachment to the property. Unlike personal homes, investors can lose the property and not lose the roof over their head; losing an investment property is like losing a stock option; it really doesn’t impact you emotionally.
Investment loans, therefore, come with tight restrictions and terms, making them less affordable and more difficult to acquire. With an investment loan, even when being used for a loved one, you may be required to bring a large downpayment; even if you have a significant downpayment, your debt-to-income ratio could stop you from getting the loan.
But Fannie Mae has identified this need and created a helpful program to ease the burden. Known as the Family Opportunity Mortgage, this program brings a variety of benefits, but there are three key reasons why it is better than an investment loan.
3 Reasons Why a Family Opportunity Mortgage from Fannie Mae is Better Than an Investment Loan
1. Low Downpayment
Perhaps the most significant advantage to the Family Opportunity Mortgage is the chance to secure the loan with a low downpayment. Although the specifics can change depending on the lender servicing the loan, you will likely be able to secure one of these loans with a downpayment as low as 5%. To be fair, 5% can be a large sum of money, but it is a fraction of the amount needed for many investment loans, which occasionally require as much as 20% or more.
So how significant is the difference between 5% and 20% on a loan? Even for modest housing, which is usually the case when purchasing a home for a family member, the difference can be staggering. (Most people, we can reasonably say, are not buying opulent mansions for their elderly parent or college-age child.)
Let’s say you are purchasing a small home in the outskirts of the suburbs for a total purchase price of $250,000. At this price, a 20% downpayment, which could very well be required from an investment loan, would be $50,000. However, if you could only bring a 5% downpayment, the total would be $12,500. This is a far more affordable entry point than the $50,000 (or more) that could be required from an investment loan. Even if you have the cash, you may not want to use fifty grand towards the home and instead keep it as liquid cash or place it in another investment; locking it into the home may not be your preferred way of using the money.
Either way, this low downpayment requirement makes the Family Opportunity Mortgage from Fannie Mae far more accessible to borrowers all across the country, and it could be the difference for helping you secure a loan without reducing your personal finances.
2. Lenient Debt-to-Income Ratio Requirements
Yes, your total income does matter to lenders and lending agents. However, what matters even more is your debt-to-income ratio. This is essentially a statement of your total monthly debt payments compared to your monthly income, and it can be a far more reliable method of gauging a borrower’s ability to repay a loan than simply looking at income alone.
Suppose you have monthly debt payments of $2,000 and a monthly income of $8,000. In this case, your debts take up a quarter of your monthly earnings, which means your debt-to-income ratio, or “DTI,” is 25%.
Lenders like to see low ratios for borrowers; the higher the ratio, the less financial flexibility the borrower has. If someone with a high ratio experiences a financial emergency, such as a major repair bill or a drop in income, they will have a harder time repaying the loan than someone with a lighter debt-to-income ratio. For this reason, lenders hesitate to deliver loans to people with high ratios, which can limit borrowing potential, especially for investment loans.
With the Family Opportunity Mortgage, you can have a debt-to-income ratio as high as 50% in certain situations. This means that even if your debts would consume 50% of your income, you may still be able to secure the loan.
3. Dual Incomes Can Be Used
Another major advantage of the Family Opportunity Mortgage from Fannie Mae is the ability to use both your income and the income of an elderly parent to secure the loan. Basically, if you are purchasing a property with an investment loan, you will probably only be able to use your own personal income, which may limit your borrowing potential.
However, if you use the Family Opportunity Mortgage, you might be able to apply any income from the parent in addition to your own income to qualify for financing. So if you have, for example, an annual income of $200,000, while your parent has $60,000 in retirement and pension earnings, you could potentially use $260,000 in qualifying income.
If you were to use only your own income, which may be the requirement for a typical investment loan, you would only be able to use your own income in most cases. While your $200,000 income is certainly a sizable amount, and should help you qualify for a large assortment of financing options, it may limit your ability to purchase a top-quality home for your parent, especially if you already have significant debts. Adding a parent’s income could lower your DTI ration, improving your chances of mortgage approval.
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If you want to purchase a home for an elderly parent, disabled child, or even a child attending college, contact our staff today to learn more about the Family Opportunity Mortgage from Fannie Mae!
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