So you say you want to buy a home but you’re locked out of the market because you don’t have enough money for a down payment. Or you don’t have adequate savings to meet lenders’ requirements on financial reserves. Or you have a “thin” credit file that lenders find tough to score and accept.
Understood. But have you checked out what’s been going on in the mortgage market lately? Are you aware of the multiple low-down-payment, consumer-friendly new options that have been launched recently?
Maybe not, so here’s a quick overview. Pushed by regulators and consumer groups to expand home loan opportunities for first-time and moderate-income buyers, major mortgage players have come out with nationwide programs designed to turn renters who are creditworthy – but don’t have big down payments or closing-cost cash – into home owners.
The newest option, known as the Affordable Loan Solution plan, launched Feb. 22. It allows for down payments as low as 3 percent, no minimum cash reserves, loan amounts as high as $417,000 and, unlike other low-down-payment mortgages, there are no charges for traditional private mortgage insurance. The latter alone can sometimes add hundreds of dollars a month onto buyers’ costs and make ownership difficult to afford, so this is a big deal. For applicants with thin or no credit bureau files, the program allows for consideration of non-traditional forms of credit, such as monthly rent payments, utility bills and the like. There is no minimum required contribution toward the down payment and closing costs, so applicants can supplement their own cash with gifts, such as from parents, or even use grants or secondary financing that is available through some local government agencies. Significantly, applications won’t go through the usual automated underwriting systems that generate instantaneous approval-disapproval decisions. Instead, they’ll be handled the old-fashioned “manual” way, allowing for more individualized evaluation – and verification – of applicants’ situations.
The program is a joint effort of Bank of America, giant mortgage investor Freddie Mac and the Self-Help Ventures Fund, an affiliate of Self-Help Credit Union, a community development lender. Starting Feb. 22, Bank of America began offering these mortgages through its network of 4,800 local financial centers around the country, as well as through its online and call center channels. The bank plans to sell the mortgages to Self-Help, which will provide early-intervention servicing to borrowers who experience payment difficulties. Freddie Mac will ultimately purchase the loans. Self-Help will provide a financial backstop to cover default losses in lieu of traditional private mortgage insurance coverage.
Affordable Loan Solution mortgages are likely to compete with Federal Housing Administration (FHA) loans, which offer 3.5 percent minimum down payments. But for many applicants, they could prove to be the superior choice. Take this hypothetical case provided by Bank of America: On a $150,000 mortgage with prevailing rates as of mid-February, FHA’s 30-year fixed rate loan with a 3.5 percent down payment and mortgage insurance would require monthly payments of $887.31, exclusive of taxes and hazard insurance. An Affordable Loan Solution mortgage in the same amount with 3 percent down would cost the borrower nearly $105 less per month – $782.47.
However, there are important restrictions that come with the new loan. Borrowers can’t have incomes higher than the area median, generally can’t have total debt-to-income ratios higher than 43 percent, and they need FICO credit scores of 660 or higher. FHA, by contrast, goes as low as FICO 580 on loans with 3.5 percent down and is often more generous on debt-to-income and previous credit issues. Some applicants, including all first-time buyers, will need to participate in homebuyer education sessions conducted by housing counselors. D. Steve Boland, Bank of America’s consumer lending executive, stressed in an interview that this is a program designed for people “who have established histories of paying debts,” even if not all their histories show up in the national credit bureau files.
The Affordable Loan Solution plan joins two other relatively recent efforts to reach out to credit-worthy, moderate-income renters who don’t have a lot of cash on hand. Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs, which both offer 3 percent minimum down payments and flexible underwriting terms, are available through multiple lenders nationwide.
If you think you might fit the profile, get in touch with several lenders and learn what they’ve got to offer. You just might be surprised.