How US Government Is Encouraging Home Ownership
As of mid-2016, homeownership is at a record low, with approximately 63% of Americans owning their own residence. This is according to the US Census, which released the data recently. Interestingly, even though homeownership is flat or even declining a bit, the economy still has expanded for at least 28 quarters in a row. More than 13 million jobs were added since the end of the Great Recession.
Still, there is little question that there is a lingering effect due to the economic crisis and it is affecting homeownership rates eight years later. The US government wants to reverse this trend; there is strong evidence that a robust housing market with an increasing number of homeowners is better for the US economy as a whole. This is due to the fact that people who own homes tend to buy things for that home and improve it, which increases economic activity. People who rent rarely feel motivated to spend money on improving the residence because they do not own it. The US government is strongly motivated to increase homeownership with a variety of loan programs for first time home buyers. Here's what they are doing to make it happen:
The US government's Federal Housing Authority backs up loans that many mortgage lenders make to credit-challenged borrowers and those with moderate incomes. FHA does this so that lenders are motivated to provide loans to borrowers who are a higher risk. The federal government will pay back the lender if the borrower defaults, so the government is effectively guaranteeing the loan. FHA has a very reasonable minimum down payment of just 3.5% of the amount borrowed. This amounts to only $7000 for a $200,000 loan, which makes home ownership much more affordable for millions of American families. This program is especially important for lower income, first time home buyers. After all, if you have no current home equity to tap, coming up with a typical 20% down payment may be completely impossible.
To qualify for an FHA loan, you generally need to have a credit score of 640, but some lenders will lend to borrowers with lower scores. This could cause the down payment requirements to change, but you need to consult with your mortgage company. Not every broker does FHA mortgages, so be sure to ask. Overall FHA has made a major difference in providing opportunities for home ownership to lower income families with prior credit challenges.
Fannie Mae and Freddie Mac
These two government agencies also back private lender mortgages. Fannie Mae and Freddie Mac have been promoting homeownership for over 4 decades. They buy mortgages from these lenders or package them into mortgage backed securities that may be sold. Lenders then use the cash that is raised to sell mortgages or to do more lending. By doing these things, both agencies attract investors to the secondary mortgage market, which then expands the amount of money that is available for lending. Also, this helps to make the secondary mortgage market more cash liquid and this makes interest rates lower. All of these activities make more private mortgage loans available for all Americans, and especially for people with lower incomes and credit scores.
Home Investment Partnerships and Community Develop Block Grants
Some eligible home buyers can get down payment and closing cost help through these federal programs. Cities and states receive block grants from HUD, and those cities and states then provide money to these programs. HOME monies are usually dedicated to increasing local affordable housing opportunities for low income citizens. According to one study, most HOME programs offer down payment and closing cost help. Some HOME programs may also provide loan guarantees, write downs of sales prices and buy downs of interest rates.
For example, from 2004-08, HOME and the American Dream Down Payment Initiative helped 25,000 low income people who were first time home buyers with their down payment and closing costs. These programs also funded some renovation expenses. The program capped assistance at 6% of the purchase price, but the average amount of help was $5000 per family.
Self-Help Home Ownership Opportunity Program
Some buyers of homes with lower incomes can reduce their monetary investment in their first home by helping the government make older homes habitable. To help the purchase price of their homes be much less, each home buyer is required to put in a certain number of 'sweat equity' hours. This could include such work as paint, carpentry, trim work, hanging and finishing sheetrock and installing roofs and siding.
The Bottom Line
It is to the benefit of the entire country that the housing market be as healthy as possible. The more people who own homes who can afford them, the more economic activity is seen throughout the economy. The US government will continue to expand the above programs and add new ones, with the intent of increasing the percentage of Americans who own their own home.