The Basics of a Location Efficient Mortgage

Location efficient mortgage is a federally backed mortgage loan available to low-to-moderate income home buyers who wish to live in urban areas where they don't have to depend on cars to get around Because location efficient mortgages are federally backed, they allow home buyers to borrow more money than privately backed mortgages. While this means the borrowers will have to spend more money repaying them, they will also be able to reduce their transportation costs. As of this writing, location efficient mortgages are available in Chicago, Los Angeles, San Fransisco and Seattle.

How Location Efficient Mortgage Works

The location efficient mortgage was developed by Center for Neighborhood Technology, the Natural Resources Defense Council, and the Surface Transportation Policy Project. it works similarly to other federally backed mortgage loans. The loans themselves are issued by the private lenders. Those lenders include Funding One Mortgage Corporation in Los Angeles and San Francisco, HomeStreet bank in Seattle, National City Mortgage Company and Draper & Kramer Mortgage Corporation in Chicago, and Countrywide Home Loans Inc. in all four cities. Fannie Mae guarantees the loans and designs their terms and guidelines. Fannie Mae's backing allows lenders to be more generous with their requirements, including lower credit scores, smaller down payments and bigger debt-to-income ratios.

What a Location Efficient Mortgage Offers

Location efficient mortgage can be used to buy purchase owner-occupied single unit detached homes, condominiums and town homes. Borrower can choose between a 13-year location efficient mortgage and a 30-year location efficient mortgage. Either way, the interest rates are set based on the market rates at the time of the sale and remain fixed for the entire duration of the loan.

Location Efficient Mortgage Terms

To qualify for a location efficient mortgages, the borrowers must reside within the metropolitan areas are any of the cities mentioned in the introduction. The metropolitan areas are defined by the U.S. Census Bureau and include both the city and most of it's surrounding suburbs. The borrower must be able to make down payment equal to 3 percent of the house's appraised value. The borrower's housing-to-income ratio must not exceed 35 percent and his or her debt-to-income ratio must not exceed 45 percent. Housing-to-income ration is the ratio between the appraised value of the house and the borrower's income, while the debt-to-income ratio is the ratio between the borrower's income and the amount of debt he or she hasn't repaid at the time of the application.

The housing-to-income and debt-to-income ratio limits can be increased up to 39 percent and 50 percent, respectively, provided the home the borrower wants to buy is located in a location efficient neighborhood. Location efficiency is based on how many schools, stores, health care facilities, recreational venues and public transit routes the neighborhood has and how far it's residents have to walk to reach them. The more location efficient the neighborhood is, the more the limits can be increased. Location efficiency is evaluated on case-by-case bases, and the limits are set accordingly.

Borrower Obligations

Once the borrower agreed to take out a location efficient mortgage, he or she is required to participate in pre-purchase counseling about home ownership and location efficiency. The borrowers are asked (but are not required) to participate in annual surveys conducted by the Institute for Location Efficiency. The surveys are conducted in order to check how the borrowers are doing and whether or not there is any aspect of the program that needs to be changed. The borrower can own a a car and drive it wherever and whenever she likes. However, the location efficient mortgage is based on the premise that the borrower can afford it because he or she drives less (if at all), saving money in the process. If the borrower does not take advantage of the neighborhood's location efficiency, he or she may not be able to afford to make monthly payments.

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