Fannie Mae Reintroduces 97% Financing for Condominium Units

Last week Fannie Mae announced the reintroduction of 97% financing for single-family homes, PUD units and condominium units.  This program would compete directly with FHA 96.5% financing…or will it?

From our experience, when Fannie Mae previously offered a 97% loan product, it wasn’t widely used.  This is primarily because the monthly mortgage insurance (MI) was so high.  Fannie Mae requires 35% insurance coverage on loans greater than 95% loan-to-value.  Depending on the borrower’s credit score, this can be very expensive.

The table, below, provides figures for three different loan scenarios: Fannie Mae 97% with a 660 credit score, Fannie Mae 97% with a 720 credit score and FHA (monthly MI not impacted by credit score).

Fannie Mae 97%
720 credit
Fannie Mae 97%
660 Credit
FHA 96.5%
Purchase Price $150,000 $150,000 $150,000
Down Payment $4,500 $4,500 $5250
UFMIP* $2,533
Total Loan Amount $145,500 $145,500 $147,283
Monthly MI $133 $179 $98
*Up Front Mortgage Insurance Premium of 1.75% charged on all FHA loans; often added to the loan amount.

The other contributing factor to the monthly payment is the increase in the loan’s interest rate.  97% poses more risk as do lower credit scores and Fannie Mae requires loan-level pricing adjustments which effectively increase the borrower’s interest rate.

Often we hear that condominiums don’t want to get FHA-approved because they don’t want “those people” moving in.  Typically, this comment is in reference to low-downpayment buyers.  Essentially, Fannie Mae has just opened the door for “those people” by offering a similar product, albeit one that is more expensive.

Now, even if associations opt to not get approved with FHA, the same 3%-downpayment buyers have the ability to purchase units, but with much higher monthly payments.  By not being approved with FHA, it forces these buyers to use a more expensive loan product.

Note:  97% loans in the State of Florida must be approved through Fannie Mae’s automated underwriting system and require full project approval of the lender or Fannie Mae through PERS for existing projects; PERS approval is required for loans in new and newly-converted projects.

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