Realty Times: Fannie Mae Commuter Loan Increases Income

May 17, 2002

Fannie Mae Commuter Loan Increases Income
by M. Anthony Carr

Would you start using mass transit if you got paid to use it? Fannie Mae is betting on it with a pilot program called Smart Commute being used in Minneapolis, Pittsburgh and coming to selected markets in the future.

Here’s how it works: a home buyer purchases a house within a ½ mile of railway service or a 1/4 mile from bus service, promising to use the mass transit as a means of traveling to work instead of driving a personal vehicle. The program then credits up to $250 per month ($3,000 annually) as additional income which would be realized through the savings of not using the automobile, (i.e., a double income household making $60,000 could now have an “income” of $63,000 through this program).

Michelle Desiderio, senior product developer for Fannie Mae, who presented the program to housing advocates last week in Arlington, Virginia, points out that auto loans are the largest category of household debt outside of home mortgages. If those expenses can be lowered, the realized savings can help put more people in homes, while reducing the use of the automobile to get to work. It’s a housing affordability and smart growth loan rolled into one.

This new program is significant when you consider the following facts from Fannie Mae:

In some metro areas, households spend more on transportation than housing.

For low income families, up to 1/3 of their income is spent on transportation costs.

Many low-income families cannot afford housing near transit.

Smart Commute, in essence, increases the purchasing power of buyers who are willing to forego their vehicles for public transportation. The program does come with some limitations.

The buyers cannot own more than two cars, while they must agree to not use their car for commuting to work (though enforcement is primarily on an honor system).

The property must be a single-family property (but not required to be a detached structure, i.e., condos are okay).

Maximum loan to value is 97 percent (But other roll outs of the model could be a 100 percent loan to value product).

Minimum borrower contribution is 3 percent.

Loan limit is $300,700 and there is no income limit.

A predecessor program was Fannie Mae’s Location Efficient Mortgage, launched in the late 1990s in Chicago, Los Angeles, San Francisco and Seattle, based on much the same concept. One of the basic differences between the two programs is that the LEM used a formula called the Location Efficient Value, calculated by a computerized mapping tool developed by the Center for Neighborhood Technology based in Chicago. Various houses presented various income credits depending on their proximity to mass transit. With the Smart Commute, the credited income is either $200 for single borrowers or $250 for two borrowers who both work.

The Smart Commute is also a simpler plan, more streamlined and automated than the LEM program, Ms. Desiderio said.

Okay – so here’s the real question – how much more house are we really talking about? An additional $3,000 per year in income doesn’t really sound like a lot of money, but when you consider that it’s an additional $70 per month toward a mortgage payment, it’s very powerful.

For example, buyers with a household income of $60,000 could qualify for a $1,200 principal and interest mortgage payment (assuming $200 per month for taxes and insurance) using the traditional 28/36 debt-to-income ratio. (Debt-to-income ratio is how much of your income is allowed per month for the monthly house payment – 28 percent – and that amount plus all your other debt cannot exceed 36 percent).

A principal and interest payment of $1,200 would provide a mortgage in the amount of $180,369 over 30 years at 7 percent. With the additional $70, that loan amount now goes up to $190,890. In essence, that additional $70 per month will buy $10,000 more house.

For more information on the Smart Commute or Location Efficient Mortgage programs or for a list of local participating lenders, consumers may call the Fannie Mae's Consumer Resource Center at 1-800-7FANNIE (1-800-732-6643).

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