In today’s housing market, aspiring homeowners confront a challenging landscape. Home prices are high, mortgage rates have risen sharply in the past few years, and there is a significant housing supply shortage, often making it difficult to even find a home to purchase.
At the Federal Housing Finance Agency (FHFA), we’re committed to responsibly identifying ways to make homeownership more affordable for families throughout the country.
In recent years, the Agency has been exploring ways that Fannie Mae and Freddie Mac (the Enterprises) and the Federal Home Loan Banks (FHLBanks) can help mitigate some of the costs associated with buying a home and obtaining a mortgage, with the goal of empowering more Americans to achieve their dreams of sustainable homeownership.
While much of the ongoing discussion about housing affordability focuses on a consumer’s monthly payments, the upfront costs associated with buying a home pose one of the largest obstacles to homeownership. In general, there are two types of upfront costs: a down payment and closing costs. The down payment is a portion of the sales price of the home that is paid by the consumer at the time of closing, representing the consumer’s initial equity in the home. Closing costs are the transaction costs associated with obtaining the home and the mortgage, such as origination, appraisal, and title fees, among others.
Role of the Enterprises
Down payments
For down payments, ensuring that consumers know about – and use – existing tools that can help to lower the amount they need to pay is a perfect place to start. For example, there are down payment assistance programs across the country that are underutilized. Both Fannie Mae and Freddie Mac have created free, online resources to match down payment assistance programs and prospective borrowers.
Additionally, Fannie Mae and Freddie Mac provide support for lower-income households through their tailored mortgage products, HomeReady and Home Possible. These programs offer flexibility around certain loan terms, specifically for lower-income borrowers. For example, qualified borrowers only need to provide a 3 percent down payment. Further, for mortgage-ready individuals who earn less than 50 percent of the area median income, both Enterprises offer $2,500 credits that can be used toward the down payment (or closing costs).
FHFA has also encouraged the growth of Special Purpose Credit Programs (SPCPs), which help households in economically disadvantaged areas – urban or rural – access credit. In 2023, approximately 15,000 SPCP loans were purchased by the Enterprises, supporting people and communities that are underserved, often by providing targeted down payment assistance.
Closing costs
FHFA is also exploring ways to responsibly reduce closing costs. Closing costs are typically 3 to 6 percent of the loan amount and can be a significant obstacle for many prospective homeowners. For a $200,000 mortgage, borrowers may need an additional $6,000 to $12,000 – on top of a down payment – to be able to close on a home.
One area in which FHFA and the Enterprises have taken steps to encourage reduced closing costs is through the available options for determining clear title on a property. The Enterprises require lenders to verify clear title on loans they sell, and lenders typically obtain a lender’s title insurance policy to do so (although this cost is generally paid for by the consumer). This is distinct from a homeowner’s title insurance policy, which protects the consumer.
To foster competition and reduce costs, both Fannie Mae and Freddie Mac have taken steps to allow greater use of attorney opinion letters (AOLs) as an alternative to title insurance. AOLs are legal opinions that provide professional determinations regarding title to a property and the priority of the mortgage lien. Freddie Mac has permitted the use of AOLs for eligible transactions for over 15 years, and in 2022, Fannie Mae updated its selling guidelines to similarly permit AOLs for certain transactions. In 2023, Fannie Mae further updated its selling guidelines to expand the types of properties eligible for AOLs to include condominiums and properties subject to restrictive covenants.
Closing costs can even be a significant obstacle for existing homeowners who are trying to refinance the loan on their current home. Refinancing a mortgage can provide homeowners an opportunity to lower their interest rate and save money on their monthly mortgage payment.
FHFA recently approved a pilot program by Fannie Mae that would waive the requirement that lenders obtain title insurance or AOLs on certain refinance loans with low risks of title defects. Such a waiver is prudent, as title to the property would have been verified during the initial purchase. In addition, a title records search will be conducted, and Fannie Mae will be prepared to resolve any title defects discovered after closing.
Once offered, this pilot program could save homeowners seeking to refinance $500 to $1,500 in closing costs. We believe this flexibility will make the refinancing process more affordable, without introducing any significant risk to Fannie Mae, the lender, or the borrower.
In order to test this concept in a controlled manner, the pilot will be limited in size and duration. We expect this pilot to provide valuable information about a potentially significant cost related to refinancing a loan. Borrowers who recognize savings and are able to refinance may not only save hundreds of dollars at closing, but thousands of dollars over the life of the loan.
Another important closing cost centers on the process of valuing a home, often accomplished through an appraisal. The Enterprises require lenders to verify the value, condition, and marketability of the properties that serve as collateral for the loans they acquire.
Appraisal waivers are a tool the Enterprises developed to remove these requirements for lower-risk loans, such as loans with a recent appraisal on file. This offering is supported by the Enterprises’ databases of tens of millions of appraisal reports, along with the necessary technology to identify the properties and loans that can qualify. When an appraisal waiver is utilized, the consumer saves the full cost of an appraisal – as well as the time associated with obtaining the appraisal.
During the COVID-19 pandemic, FHFA worked with Fannie Mae, Freddie Mac, and the appraisal industry to increase the use of other valuation alternatives, such as desktop and hybrid appraisals, while also more broadly utilizing appraisal waivers. These innovations were necessary at the time, as the sudden health emergency from COVID-19 often kept appraisers out of homes altogether. The significant volume of mortgage refinances also placed stress on appraiser capacity, and these tools relieved some of that stress, particularly in areas with shortages of appraisers.
In the years that followed, the Enterprises developed a new type of appraisal waiver that is accompanied by standardized property data collected by a trained third party. These inspection-based appraisal waivers provide more consumers with the ability to lower the costs associated with the home valuation process, and they have been shown to save borrowers hundreds of dollars relative to a traditional appraisal.
Role of Federal Home Loan Banks
The Federal Home Loan Banks are also a key pillar in our efforts to make affordable homeownership accessible to more Americans. For example, through the Affordable Housing Program, the FHLBanks provide funds to finance the purchase, construction, or rehabilitation of homes for low- and moderate-income households. Each FHLBank annually sets aside at least 10 percent of its prior year’s net earnings to support the program, although many FHLBanks have voluntarily set aside more. Since 1990, the FHLBanks have awarded over $8 billion in funding to their members for eligible projects. The projects address a number of housing needs, including affordable housing for older adults, persons with disabilities, formerly homeless individuals and families, and other targeted populations.
In addition to the Affordable Housing Program, each FHLBank also offers voluntary programs to meet the needs of households in its district. Many of these programs support affordable and sustainable homeownership, including by providing additional funds that can be used for down payment and closing cost assistance and supporting housing counseling that prepares potential buyers for homeownership. Voluntary programs also contribute to increases in housing supply by helping build the capacity of residential developers.
At FHFA, we’re doing what we can to help families across the country become homeowners, if they so choose, in a safe, sustainable manner. By addressing the challenges associated with the costs of homeownership, we and our regulated entities are making the process more affordable – and we remain committed to doing so prudently and responsibly, to protect borrowers, industry stakeholders, taxpayers, and the housing finance system overall.
Tagged: Source: FHFA; Affordable Homeownership; Down Payments; Closing Costs; Fannie Mae; Freddie Mac; Affordable Housing Program; FHLBanks see ＂Federal Home Loan Banks＂