Millions of home mortgages are made each year, and yet some prospective buyers with generally good credit and earnings still cannot get financing. The issue: Old rules, based on old presumptions, disqualify unknown numbers of potential buyers, especially low- and moderate-income purchasers.

The logic behind the old rules is that they seemed to protect lenders in the past. But now Freddie Mac has taken another look at some of the old standards, made changes, and the result is likely to be more financing opportunities and thus more home sales.

Boarder Income

Lenders have traditionally refused to recognize income from boarders, the theory being that such income is difficult to predict. Rent from boarders can only be obtained after a home has been purchased, which means there is no certainty before closing that such rental income can actually be generated.

Freddie Mac now says buyers can obtain credit for boarder income, but there's a catch. Not any old boarder will do. Income from boarders only counts if the tenant is a relative.

The presumption, apparently, is that income from relatives is somehow more assured then income from non-relatives. Alas, not all families are harmonious, especially when the subject is money.

However, a willingness to count income from related boarders will give Freddie Mac underwriting experience and over time -- if that experience is good -- perhaps boarder income from non-relations will also be allowed.

Job Longevity

Another change concerns job tenure: Lenders traditionally like to see borrowers with some history at the same job or at least in the same field. Now Freddie Mac says that it will no longer require a minimum period of employment for those with steady income and good prospects.

College and trade-school students entering the workforce, seasonal workers, and others are likely to benefit from this change, says Freddie Mac. In effect, it may be possible to acquire a mortgage without waiting for a year or two with a given employer to pass, or to obtain a job in a new field without fear of being disqualified for financing.

Cash On Hand

Not everyone is attached to the banking system and uses checks. A study published the Federal Reserve Bulletin in January, 1997 showed that about 13 percent of all households do not have checking accounts, savings accounts, or mutual fund accounts.

Such individuals -- and 13 percent of all households likely represents some 35 million people -- operate on a cash basis. Now, says Freddie Mac, "cash on hand" can be used to purchase a home by those who do not usually maintain checking and savings accounts.

Down Payment Help

Lastly, Freddie Mac is introducing a new down payment wrinkle.

In the usual case, owners and builders are allowed to make "seller contributions" to offset closing costs. Buyers, however, must come up with down payment money. Now, says Freddie Mac, those who buy new homes with the "Builder Grant" option from members of the National Association of Home Builders (NAHB) may be able to apply a seller contribution of up to 3 percent toward closing costs or the down payment.

For specifics, qualifications, and the latest information, please speak with local brokers and lenders before you enter the homebuying marketplace.

For more articles by Peter G. Miller, please press here.

Published: March 19, 2002

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