For middle-income borrowers, an FHA loan is the best option (i.e., the borrower is more likely to get approved), but the faster appreciation of home prices relative to income growth has increasingly made a home purchase less affordable. Since 2012, house prices have increased by 68 percent, while incomes have increased by 15 percent.
Low downpayment conventional loans are available, but middle-income earners may be hard pressed to meet the downpayment on a bigger loan. Moreover, borrowers with less than sterling credit profiles and with little downpament bear additional costs associated with a higher mortgage rate that government-sponsored enterprises (Fannie Mae and Freddie Mac) charge to reflect the higher borrower risk (called loan level price adjustments, which reduce lender’s fees). [7] For example, Fannie Mae assess an LLPA of 1.5 percent of the loan ($1,500 on a $100,000 loan) on a loan it will purchase from a lender where the a borrower has a 680 FICO score and a loan with a 95 loan-to-value ratio (or 5 percent downpayment), The LLPA rises to 3.5 percent ($3,750) for borrowers with less than 620 FICO score. LLPAs increase the mortgage rate charged to borrowers because lenders make up for the reduction in fees arising from the LLPA by increasing the mortgage rate charged to the borrower.
