Down payment by credit card Fannie Mae's pilot program helps homebuyers

Flex 97 being tested

24 Baltimore lenders receive $50 million for use in the city

September 07, 1997|By Robert Nusgart | Robert Nusgart,SUN REAL ESTATE EDITOR

For homebuyers who have shown that they have superior credit, Fannie Mae has a new way to make that down payment.

Just whip out that credit card and charge it.

Several Baltimore-area lending institutions are participating in a pilot program being rolled out by Fannie Mae called Flex 97.

The program, being tested in 24 markets, is a hybrid of the Fannie 97 program, which allows borrowers to pay just 3 percent down.

But among the differences between the two is that the down payment for a Flex 97 loan can come from just about any source, such as an unsecured line of credit or credit card.

Fannie 97 requires that the down payment come directly from a borrower's savings.

Fannie Mae has allocated $50 million to approximately 24 Baltimore lenders for use in the program, which is limited to purchases in Baltimore City.

Among the lenders offering the product are Crestar, First National Mortgage, Provident Bank, Harbor Bank, Columbia National and First Tennessee.

It's a program that Fannie Mae officials say isn't for everyone, but it does help a certain segment of the market.

"It is to reward those people who have taken care of their credit, who have gone the extra mile to make sure that they have maintained good credit," said Tim Carlsgaard, regional communications manager for the Federal National Mortgage Association, the federally chartered lending giant better known as Fannie Mae that buys mortgages on the secondary market.

"The key to the whole program is trying to reward people who have good credit but who lack the money, the down payment," Carlsgaard said.

"Banks do loan to people with good credit. However, no bank is going to make a mortgage to someone who doesn't have a down payment."

The No. 1 obstacle

Trying to help potential homeowners achieve a down payment always has been on the minds of those at Fannie Mae.

Citing the 1997 Fannie Mae Housing Survey, Carlsgaard said 44 percent of those questioned said not having enough money for a down payment and closing costs is the No. 1 obstacle to buying a home. And that's why Fannie Mae is testing this program.

"For the first time at Fannie Mae, they can use almost any source that they [borrowers] can document as their down payment," said David Elam, head of the Fannie Mae Partnership Office in Baltimore.

"In the past, where you had to have 3 percent in your own pocket you can now use a credit card."

Criteria for qualifying

But to be able to use that credit card, a borrower must qualify under rigid underwriting guidelines.

Foremost among them is to have a FICO credit score of 660 or higher on their credit report. Credit scoring -- usually done by the Fair Issac Co. in California -- is a process where a borrower's credit is evaluated and then assigned a number ranging from TC 520 to 900.

A higher number means a better credit risk; a lower number tells the lending institution there is more of a chance for default.

A lender can also use alternate means to qualify the borrower. Among those guidelines, the borrower must have:

* A minimum of four lines of credit that have been open for at least two years.

* No history of major delinquency.

* No history of delinquency on housing debt.

* No more than one 30-day late payment on any revolving account.

* No more than 50 percent being used on present credit cards.

* Two months of cash reserves equal to the projected mortgage payment.

The program has no income limits, and the maximum loan is $214,600, the standard conforming limit for Fannie Mae.

"The bottom line is that if you have good credit, your equity in it is not the real indicator," Elam said. "Traditionally, you have to have equity in the purchase of a home; in this case, what we are looking at is your credit history and your pattern of payment."

And that seems to suit some lenders just fine.

"I applaud the effort on Fannie Mae's end to look at other ways for people to acquire property beyond the traditional underwriting guidelines and credit standards," said Payton Herbert, vice president of secondary marketing at Harbor Bank, which already has approved two Flex 97 loans and has another five to seven in the pipeline.

'Yuppie product'

In one respect, he labeled Flex 97 a "yuppie product" because it seems tailored to borrowers who are coming out of college, have few credit liabilities, good income but little cash.

"I see it in a test-tube. We're in a lab and we're testing this," Herbert said, adding that he expects Fannie Mae to take five to seven years to evaluate repayment histories to see if the program is a success.

But Elam said that in other markets -- Minnesota, Iowa and the Dallas/Fort Worth area -- the program has "performed beyond what was originally indicated and projected" by Fannie Mae.

Yet the fact that a borrower can use a credit card to charge a down payment did make one lender a bit uneasy.

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