So you still think it’s impossible to get a mortgage because lenders’ standards continue to be super-strict and your profile doesn’t quite fit the standard underwriting molds? You’re right — it can be tough. But it’s no longer impossible, thanks to new programs that are becoming available from national and regional lenders for applicants who qualify.
Check out terms like these:
• Minimum down payments of 3 percent or even 1 percent, sometimes without monthly mortgage insurance premium charges.
• Debt-to-income levels that stretch as high as 45 percent to 50 percent.
• Looser definitions of what qualifies as income.
• Underwriting flexibility that acknowledges that growing numbers of Americans live with extended families and have multiple resident earners who can contribute to household expenses.
Things have loosened up in recent months — and it’s good news for buyers with moderate incomes and not a lot of down payment cash who are stuck paying rising rents and see no clear path to homeownership. It’s all part of a nascent effort by major lenders and mortgage investment giants Fannie Mae and Freddie Mac to reach out to credit-worthy borrowers — millennials, immigrant families and first-time buyers of all backgrounds.
The key term here is credit-worthy. The new low down payment loans are not for people with subprime credit histories or FICO scores in the tank. Unlike mortgages during the bubble years of 2004 through 2007, they come with mandatory full documentation underwriting, buyer education counseling programs and the sort of hands-on servicing that was painfully absent a decade ago.
Take Quicken Loans’ 1 percent down program, for example. If you are qualified on credit and income, Quicken, the largest independent mortgage lender in the country, may give you a “grant” of two-thirds of the 3 percent mandatory down payment. You’ve got to come up with the remaining one-third — 1 percent of the house price. Quicken does not require its grant money to be repaid. But it does vet you thoroughly up front and requires a minimum FICO credit score of 680. Plus you need to have household income below the median for your county, and your household debt-to-income ratio cannot exceed 45 percent. Quicken also offers a 3 percent down alternative. Both programs compete directly with Federal Housing Administration, or FHA, mortgages that require 3.5 percent down and come with mortgage insurance premiums that are noncancellable for the duration of the debt.
Quicken CEO Bill Emerson told me that although the company’s 1 percent and 3 percent down plans are relatively new, “our data shows they are performing very well” and are expected to continue doing so because they are carefully underwritten. They’ve got average FICO scores of 739 and average debt-to-income ratios of 36 percent. Roughly 90 percent of all borrowers funded have been first-time home purchasers, according to Emerson.
Or consider the 3 percent down program offered by Bank of America in partnership with Freddie Mac and Self-Help Ventures Fund, an affiliate of Self-Help Credit Union, a community development lender: The program does not require borrowers to have any specific amount of cash reserves — a common problem for millennials and families with modest incomes. Plus there’s no private mortgage insurance or required monthly premium payments although the fixed interest rate is marginally higher than on a standard conventional loan, currently about 4.5 percent, according to Deborah Momsen-Hudson, director of secondary marketing at Self-Help Credit Union.
Another variation of the new low down payment concept comes from two mortgage companies specializing in lending to minority and moderate-income first-time borrowers: Alterra Home Loans and New American Funding. Partnering with Freddie Mac, the companies jointly launched the “Your Path” pilot program last month. Minimum down payments are 3 percent; earnings from second jobs held by borrowers can be counted if the employment has been continuous for at least 12 months (half the usual 24 month requirement); and incomes from nonborrower residents can be used to extend the maximum debt-to-income ratio of 45 percent to 50 percent.
Jason Madiedo, CEO of Alterra, told me the target borrowers are people supplementing family incomes with multiple jobs, where total incomes often don’t fit traditional underwriting requirements. They “are typically Hispanic or other immigrants,” he said, “they’re hardworking, stable and responsible. They simply want to achieve their dream of homeownership.”
He’s betting they do great on repayments. But just in case, the company is servicing the loans intensively — checking in monthly at least — to make sure all is well.
Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors. Reach him at KenHarney@earthlink.net.
