State offers rock-bottom mortgage interest rate - Finance & Commerce

First-time homebuyers with modest incomes could pay just a 2.75 percent interest rate on their mortgages in state program. (File photo: Bill Klotz)

Low-income, first-time borrowers still face obstacles

In an era of jaw-dropping financial numbers, here?s another one: a 30-year fixed-rate home mortgage with an interest rate of just 2.75 percent.

That?s the new rate for a loan offered to first-time home buyers by Minnesota Housing, the state housing finance agency. The new rate, which replaces a 3.25 percent rate, is the lowest ever offered by the agency and the lowest available from any state housing agency, said Minnesota Housing spokeswoman Megan Ryan.

The new rate will push monthly mortgage payments down to about $1,168 on a $178,000 home, just above the average $1,130 monthly rent on a two-bedroom apartment, according to Minnesota Housing.

?We hope that this will benefit a lot more low-to-moderate income households who?ve been renting up to now but will be able to afford to buy a home now,? and lock in very low housing payments for many years, Ryan said. Households with incomes up to the metro median ? $83,900 in the Twin Cities ? and up to four people are eligible.

Despite those historically low rates, housing advisers who work in low-income markets that the agency is targeting warned that many households still won?t benefit by the new rates ? at least in the near term.

?A lot of the people we work with won?t qualify? for the agency?s mortgage program or more conventional products, says Jim Erchul, executive director of the Dayton?s Bluffs Housing Services in east St. Paul. Erchul?s organization redevelops housing in and around the Dayton?s Bluff neighborhood and advises low-income residents on home buying.

?Lenders of all types have gotten very tight on underwriting mortgages and that?s not changing,? Erchul said.

The underwriting roadblocks come from credit scores and work histories. Lenders have returned to an earlier standard requiring that a borrower have three consecutive years of work to qualify for loans, and they?re also requiring higher credit scores than in the past, said Ed Nelson, spokesman for the St. Paul-based Home Ownership Center. Conventional lenders are looking for credit scores of at least 720 now.

?Because of the economy we?ve been in, people on the low end of the job scale have had a hard time keeping their jobs ? they were the first ones laid off,? Nelson said. Many also fell behind on loan or rent payments, which lowered their credit scores.

But Nelson said conventional and agency lenders and nonprofits are offering products and counseling to help remedy those credit woes.

?People can work out payment and debt issues and put themselves into a good buying position where they can be successful long term,? he said. ?These rates will stay low ? people don?t need to be in a hurry.?

Minnesota Housing?s mortgage product was designed with an easier threshold than its conventional partners, requiring a credit score of just 580 and a down payment of just 1.5 percent. The agency offers other products to finance or reduce down payments.

?We?re really trying to reach people who otherwise are underserved by the lending market,? Ryan said.

All borrowers in the program also must complete home buying and home ownership classes to help them prepare for the maintenance and continuing investments that homes require.

Despite the obstacles facing some households, the new low rates should add buyers to the starter home market, said Chris Galler, CEO of the Minnesota Association of Realtors and a member of the Home Ownership Center?s board.

?The key is that these guys broke that 3 percent barrier, and nobody ever expected that. If first-time buyers can lock that rate in for 30 years at these home prices they?re getting a great deal,? Galler said. Conventional home mortgage rate are pricing between 3 and 3.5 percent now, he added.

The agency?s loan budget reflects its ambitions for the product:? It will increase its allocation to the loan program by 44 percent to $420 million in 2013.

The continuing investor appetite for high-quality municipal bonds played a role in the agency?s ability to push its rates to a record low. Minnesota Housing sold a series of mortgage revenue bonds in late September, raising $75 million at an interest rate of just 2.25 percent, Ryan said.

State taxpayers bear no responsibility for repayment of the bonds, she said.

Terms for low-rate loans

Loan term: 30 years

Interest rate: 2.75%

Down payment: 1.5% of home cost

Income maximum: $83,900 (metro median)

Home price maximum: $298,125

Source: Minnesota Housing?

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Source: http://finance-commerce.com/2012/10/state-offers-rock-bottom-mortgage-interest-rate-2-75-percent/

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