home loan

Is The Zero-Down Mortgage Loan Making A Comeback?

Buyers may soon be able to bring less to closing. They were blamed for precipitating the housing crisis years ago, but major lenders are giving no- and low-downpayment loans another shot.

Several major lenders are reportedly offering loans with just 1 percent down. Navy Federal, the nation's largest credit union, offers its members zero-down mortgages in amounts up to $1 million. NASA Federal Credit Union markets zero-down mortgages as well.

Quicken Loans, the third highest volume lender, offers 1 percent downpayment options, as does United Wholesale Mortgage. And the Department of Veterans Affairs has offered zero-down loans to eligible borrowers for many years.

Also, Movement Mortgage, a large national lender, has introduced a financing option that provides eligible first-time buyers with a non-repayable grant of up to 3 percent. As such, applicants can qualify for a 97 percent loan-to-value ratio conventional mortgage, which is basically zero from the buyers and 3 percent from Movement. For example, on a $300,000 home purchase, a borrower could invest zero personal funds with Movement providing $9,000 down. The loan also allows sellers to contribute toward the buyer's closing costs.

So far, the delinquency rates on these low- to zero-down payment loans have been minimal, according to lenders. Quicken Loans says its 1 percent down loans have a delinquency rate of less than one-quarter of 1 percent. United Wholesale Mortgages told The Washington Post that it has had zero delinquencies from the borrowers on its 1-percent down loan since debuting it last summer.

For Movement's new loan product, the lender will originate the loans and then sell them to Fannie Mae, which remains under federal conservatorship. Fannie officials released the following a statement:

"(We're) committed to working with our customers to increase affordable, sustainable lending to creditworthy borrowers. We continue to work with a number of lenders to launch (test programs) that require 97 percent loan-to-value ratios for all loans we acquire." They add that there "is no commitment beyond the pilots," which are "focused on reaching more low- to-moderate income borrowers through responsible yet creative solutions."

During the housing crisis, zero-down loans were among the biggest losses for lenders, investors and borrowers. However, housing experts say the latest versions are different from years ago. Applicants must now demonstrate an ability to repay what's owed. They also must have stellar credit histories and scores, and lenders require a lot more documentation to prove borrowers are in good standing.

Also, many of the programs are charging higher interest rates. For example, Movement's rate for its zero-down payment option in mid-June was 4.5 percent to 4.625 percent, compared with 4 percent for its standard fixed-rate mortgages.

Some critics say that the borrowers who really could benefit from such options aren't able to qualify for them. Paul Skeens, president of Colonial Mortgage Corp. in Waldorf, Md., told The Washington Post that "it seems like people without excellent credit scores and three months of [bank] reserves don't qualify."

Source: "No Down Payment? No Problem, Say Lenders Eager to Finance Home Purchases," The Washington Post (June 14, 2017)

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact an attorney.

How to Get Your Down Payment and Closing Costs Paid For You

Buyers can finance their Down Payment and Closing Costs with Community Second Mortgages - Community second mortgages allow eligible homebuyers to finance their down payments, closing costs and even home improvements.

This type of assistance may be offered by states, counties, local housing agencies, nonprofit organizations or Employer Assisted Mortgage (EAM) programs.

Subject to qualification, Fannie Mae and Freddie Mac allow buyers to finance over 100 percent of your home's purchase price.  They do this by combining the first mortgages with a second mortgage (this loan arrangement will work with HomeReady and Home Possible programs).

The Fannie Mae program is called Community Seconds, and the Freddie Mac option is called Affordable Seconds.

Down Payment Assistance and Closing Costs

Community second mortgages allow eligible homebuyers to buy houses with no out-of-pocket down payment or closing costs.

Repayment may be structured in several ways:

  • they may make monthly fixed monthly payments until the loan is repaid.
  • they may be allowed to defer (put off) repayment for some period. Then, you make fixed monthly payments until the loan is repaid.
  • they may not have to make payments at all. The loan is only repaid if you sell the property.
  • they may not have to repay the loan if you remain in your home for a specified number of years.

If repayment is deferred for five years or more, the second mortgage payment is not counted when the lender calculates the debt-to-income ratio (DTI).

Who Is Eligible For Community Second Mortgages?

Community second mortgages are offered by many sources.

According to the OCC (United States Office of the Comptroller of the Currency), most EAM programs have some income-eligibility requirements. With regard to income, generally, no more than 120 percent of the Area Median Income (AMI).  As it concerns credit scores, no lower than a 640.  Further, buyers must qualify in the usual manner as it relates to job stability, income sources etc.

The assistance may be limited to first-time buyers, and require some form of homebuyer education or counseling.

Every loan has its own requirements, so once the down payment and closing cost programs have been located in the buyers’ area, attention must be paid to the specific guidelines.

Finding Your Program

These second mortgage programs requirements can vary from county to county of state to state.

An online search for "community second mortgage by city, county or state will bring up programs offered by local housing departments.

HUD’s State pages may also have some resources.  Select State, then "Homeownership Assistance," and a list of links and contact information for many programs will be generated.

Mortgage rates for home loans with Community Seconds or Affordable Seconds are still very low. Combining the two mortgages can get a buyer into a home they can afford with little or nothing out-of-pocket.  These programs take time, so preparation and an early start is the key.  ** Funds are subject to availability.

This year, let’s be creative and continue to help our buyers get the best of what’s available to them.


For Home Loans, 3% Down is the New 20%

Derrick Reed has had enough of living in an apartment. The 57-year-old retired autoworker used to own a home, he says, but sold it in 2012 after his "health went sideways." He has rented an apartment in Indianapolis since then but wants to get back to the lifestyle he used to have.

"I am not an apartment dweller," Reed said. "I just like having my own space. Even though my neighbors have been pretty good – I don't hear a lot of noise – still, it's not mine."

Reed has zeroed in on a home in the city's Liberty Creek neighborhood that he hopes to buy in about a month. There's only one problem: Reed doesn't have much money saved for a downpayment. "I'm on a fixed income," Reed said, laughing. "I'm getting old."

Many buyers like Reed have been shut out of homeownership in the years since the housing crash. Banks tightened lending standards, making it harder for buyers to qualify for mortgages, and they required higher downpayments. But seven years into the economic recovery, financial institutions are once again making it easier for people to participate in the so-called American dream of homeownership.

Some of the nation's largest banks in recent weeks have trimmed downpayment requirements on conventional loans, without private mortgage insurance, to as little as 3 percent. A few financial institutions are even offering zero-down mortgages. The lending products are geared toward first-time buyers and people with good credit who have had trouble saving money.

Reed is working with Old National Bank to get a mortgage that will allow him to buy the house he wants. Evansville-based Old National has a variety of mortgage products that enable buyers to close for as little as $1,000 out of pocket, thanks to outside grants. Old National works with the Indianapolis Neighborhood Housing Partnership, Federal Home Loan Bank of Indianapolis and the Federal Housing Administration to help buyers get downpayment assistance.

"Even with the job situation changing (during the recovery), for some people, it's just hard to get that savings where you have that 3 percent," said Sherry Boudoin, a loan officer for Old National who specializes in affordable mortgage products. "It's hard to live and also put money aside for the downpayment."

Some of Old National's most appealing mortgage options aren't for everyone, though. The products with the lowest downpayments are geared toward low- to moderate-income or first-time buyers.

3 percent down

But new options are sprouting for people who don't fit into those categories. Wells Fargo, Chase and Bank of America recently launched conventional mortgages requiring as little as 3 percent down – all while avoiding costly mortgage insurance that typically applies to loans with low downpayments.

Bank of America in February rolled out a 3 percent downpayment program that requires buyers to have a credit score of at least 660. To qualify, buyers also must have incomes no higher than the median in their area. The mortgages are backed by Freddie Mac and Self-Help Ventures Fund.

Wells Fargo and Chase followed with similar programs in May, both of which also require a minimum 3 percent downpayment. Unlike Bank of America's 3 percent downpayment mortgage, the Wells Fargo and Chase products don't have income limits. They target first-time buyers, but they're available to virtually anyone with good credit scores.

Wells Fargo's YourFirst Mortgage is an option for buyers who have a 620 credit score or higher. The program can be used to buy houses that cost up to $417,000. Buyers can save one-eighth of a percent off their interest rate if they complete a homebuyer education course. In addition, money for the downpayment and closing costs can come from gifts, a relatively rare allowance for mortgages.

Chase's new plan, called Standard Agency 97 percent, requires a 680 credit score, the highest of the new 3 percent downpayment options. No buyer education course is required.

Mortgages in the 3 percent range aren't new. FHA-backed loans, for instance, have long enabled buyers to get mortgages for as little as 3.5 percent down. But banks recently have soured on issuing FHA loans after being hit with billions of dollars in fines for making what they call minor errors on them. FHA loans also require mortgage insurance, an additional cost, just like many other low downpayment mortgages offered by banks in recent months.

'Higher-risk loan'

Banks are starting to sidestep unpopular mortgage insurance – and the FHA – thanks in part to a 2014 deal with federal regulators in which Fannie Mae and Freddie Mac began backing mortgages that covered up to 97 percent of the value of homes. Fannie and Freddie buy mortgages from lenders and guarantee their values to investors.

The low downpayment trend carries risk for financial institutions and buyers. There is plenty of evidence that low downpayments have higher default rates than loans issued to buyers making the traditional 20 percent down payment, said Daren Blomquist, the vice president of RealtyTrac, a California firm that analyzes real estate data.

"When we break out the foreclosure rates on FHA loans, they are always considered higher than overall loans," Blomquist said. "FHA has a consistently higher default rate over the years, so there's no doubt about it that when you have a lower downpayment, it's a higher-risk loan."

One reason for that: When buyers who make large downpayments fall into financial trouble, they have more equity that enables them to sell, whereas buyers who make low downpayments might owe more money than their houses are worth.

Nationally, the average downpayment on mortgages fell to an all-time low of around 11 percent in late 2008, according to RealtyTrac – just as the housing market was collapsing. As banks raised their standards, the average downpayment ticked up to nearly 16 percent in fall 2013 before starting to slide again. It has been hovering around 15 percent for the past year.

Although low downpayment loans might lead to increased foreclosures, Blomquist said they can't entirely be blamed for the last housing crash and won't singlehandedly cause another one.

"It wasn't just the low downpayment piece of it. It was very lax lending standards and underwriting standards," Blomquist said. "Really, to qualify for loans, homeowners were not even required to document income or debt-to-income ratio, and I believe this time we do have much tighter lending standards in place that are documenting income and holding the line in terms of creditworthiness of buyers."

Raising awareness

Randy Thomas, a sales manager in Indianapolis for Wells Fargo, said the bank's new 3 percent down product is a way of helping first-time buyers, as well as people who got pummeled during the recession and have found their way back into steady employment.

"There are people that had some challenges during the years since 2008, and people fell on hard times," he said. "They're trying to get re-established and get back to homeownership."

One challenge so far, Thomas said, has been educating people that mortgages are available for downpayments of less than 20 percent.

"They're not aware of all the other alternatives and opportunities," he said.

A few financial institutions have brought back zero-down mortgages. Navy Federal Credit Union, which serves members of the military and their families, has offered a zero-down mortgage since 2005. The credit union stopped marketing it for a couple of years during the recession but has been touting it again since 2010.

Zero-down mortgages account for 10 to 15 percent of Navy Federal's home loans each year, said Katie Miller, the credit union's vice president of mortgage lending. Fewer than 1 percent of them default, Miller said.

Financial institutions that are offering the lowest downpayments on conventional loans tend to have one thing in common: They're big. Navy Federal is among the nation's largest mortgage providers, and Bank of America, Wells Fargo and Chase are among the so-called systematically important financial institutions (SIFI), a term that refers to the largest of the financial giants.

"The 3 percent down mortgage strikes me as unfair competition by SIFI institutions," said Charles Trzcinka, a finance professor at Indiana University's Kelley School of Business. "The federal government will buy many of these mortgages, but banks will still take the risk of issuing mortgages that have a higher failure rate. They will obviously take the default risk if they hold these mortgages and don't sell them. The clear reason why they are doing it is the higher interest that they will get."

Smaller banks such as Old National must get creative to compete with the giants, helping buyers apply for grants and housing programs to spend as little as possible upfront.

Reed, who hopes to buy a house in Liberty Creek, doesn't necessarily care which mortgage program he uses. He chose Old National because the process seemed comfortable, he said.

Reed is hoping to spend about $105,000, a more modest amount than he spent on his previous house, he said. He wants to be responsible. He just needs a little help getting the key.

"We're close," Reed said. "I just want to close as soon as possible, because I'm tired of paying rent on an apartment."

Copyright © 2016 The Indianapolis Star, James Briggs. Distributed by Tribune Content Agency, LLC.  Source