They were all the rage — then the scourge — of the housing boom and bust. Now they’re back, big time: Home mortgages that require tiny or zero-down payments from buyers.
Several major lenders are offering 1 percent down payment loans, and now a large national mortgage company has gone all the way, requiring absolutely nothing down. Movement Mortgage, a top 10 retail home lender, has just introduced a financing option that provides eligible first-time buyers with a nonrepayable grant of up to 3 percent. This allows applicants to qualify for a 97 percent loan-to-value ratio conventional mortgage — essentially zero from the buyers, 3 percent from Movement.
To illustrate: On a $300,000 home purchase, a borrower could invest nothing from her or his personal funds, while Movement contributes $9,000 from its resources. The loan terms also permit seller contributions toward the buyers’ closing costs to help swing the deal. Duke Walker, branch manager for Movement for the Washington, D.C., area, told me that although the program is brand new, it’s already “going great guns.”
Movement is hardly the only player in this arena. Navy Federal, the country’s biggest credit union, has offered members zero-down mortgages for years in amounts up to $1 million. NASA Federal Credit Union also markets nothing-down mortgages. Quicken Loans, the third highest volume lender according to Mortgage Daily, a trade publication, offers a 1 percent down option, as does United Wholesale Mortgage, another large national lender. The U.S. Department of Veterans Affairs also has been doing federally guaranteed zero-down loans for years.
In the case of Movement’s new plan, the mortgages are being originated for sale to giant investor Fannie Mae, which operates under federal conservatorship. Sensitive to the possibility that critics might perceive it as providing support — and ultimately a federal guarantee — on seemingly high-risk loans, Fannie provided me with this statement: The company “is committed to working with our customers to increase affordable, sustainable lending to creditworthy borrowers,” Fannie said. “We continue to work with a number of lenders to launch test-and-learn pilots [pilot programs] that require a 97 percent loan-to-value ratio for all loans we acquire.” There “is no commitment beyond the pilots,” the statement went on, and all of them are “focused on reaching more low-to-moderate income borrowers through responsible yet creative solutions.”
Nothing-down loans were among the biggest losers for lenders, investors and borrowers during the disastrous housing bust years, often extended to people whose incomes and debts went undocumented. The latest versions are starkly different. Under federal rules, applicants must demonstrate an ability to repay what’s owed, must have solid if not excellent credit histories and scores, and must document everything.
So how well are these mortgages performing? Quicken said its 1 percent down loans have less than a one-quarter of 1 percent delinquency rate. United Wholesale Mortgage said its version has experienced no delinquencies since its debut last summer. Records like this are possible, the lenders involved said, because 1 percent and zero-down offerings are conservatively underwritten. United’s minimum FICO credit score is 720. Quicken’s posted minimum is a 680 FICO, but the young, mainly first-time buyers who use the program have an average score around 750. Movement’s zero-down loan is an exception: Minimum FICO is just 640 in most parts of the country. (FICO scores run from 300 to 850, with higher scores denoting higher creditworthiness.) Maximum debt-to-income ratio for the Quicken program is just 37 percent, well below the 45 percent ceiling for most conventional loans that carry much larger down payments.
Most of the programs also charge higher interest rates. Movement’s rate for the zero-down option in mid-June was 4.5 percent to 4.625 percent, compared with 4 percent for its regular fixed-rate mortgages. Navy Federal charges 4.625 percent for its 30-year zero downs.
In fact, the credit standards and higher rates on these loans are attracting some criticism from within the mortgage industry. Paul Skeens, president of Colonial Mortgage Corp. in Waldorf, Md., said many of the cash-strapped, moderate-income first-time buyers who really need these programs can’t meet the required standards. “It seems like people without excellent credit scores and three months of [bank] reserves don’t qualify,” he told me.
The takeaway here: If you’re interested in pursuing one of these new low or zero-down payment plans, be aware that unlike the bad old days, these come with real qualification requirements and costs expressly designed to minimize defaults and foreclosures.
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.