Bank of America’s Affordable Loan Solution
In what is looking a lot like a jab at the FHA, Bank of America is set to launch a 3% down payment mortgage nationwide with the help of Freddie Mac and nonprofit Self-Help Ventures Fund.
The new loan program, known as the “Affordable Loan Solution,” aims to help underserved borrowers obtain homes with very little down.
It counters the flagship FHA loan program, which requires 3.5% down payment and marginal credit scores, and appears to be quite similar to Freddie Mac’s Home Possible Advantage loan program.
Bank of America is apparently rolling out the program as an alternative to the FHA, with managing director D. Steve Boland citing the “uncertainties” when working with the FHA.
His comments likely relate to a number of recent lawsuits with the Department of Housing and Urban Development (HUD) over faulty FHA loans.
Wells Fargo just agreed to pay $1.2 billion to settle claims it made reckless FHA loans, and Quicken has a pending lawsuit involving the quality of the FHA loans it originated.
Put simply, lenders are losing confidence in the FHA because they’re unsure of the potential liability/penalties they face if the loans are deemed defective.
Affordable Loan Solution Requires 660 Credit Score
Bank of America’s new Affordable Loan Solution has some pretty liberal requirements, though the credit score needed to qualify is a bit more reasonable (with regard to not being completely dismal).
Borrowers are required to have a 660 credit score or higher to qualify for the loan, which is significantly higher than the 580 required at the FHA.
However, the down payment required is just 3%, as opposed to 3.5% at the FHA.
I believe the loan is only available on owner-occupied properties, though I don’t know if it’s limited to just single-family properties or condominiums as well.
Another pro to Bank of America’s low-down payment loan program is the lack of private mortgage insurance (PMI).
Because the loan will be originated by Bank of America and then sold to Self-Help Ventures, who will then sell it to Freddie Mac, PMI isn’t required.
Apparently Self-Help will take a “big chunk of the losses” if the loan defaults before Freddie Mac will step in. Still, that doesn’t mean borrowers won’t pay a premium to avoid PMI.
The bank says a $150,000 mortgage will cost about $782 per month for those with a credit score between 680 and 719, compared to $887 on a comparable FHA loan.
If we reverse engineer the math, the mortgage rate is 4.75% on the new loan program, which isn’t particularly low, even for a low-down payment mortgage.
So you can argue that the risk is built into the loan, even if the payment is lower than an FHA loan.
Borrowers must also make an income that is below the area’s median to ensure the loans go to those who actually need it most.
$500 Million Set Aside for the Affordable Loan Solution
Bank of America is limiting the new loan program to $500 million in funding annually, at least initially.
Despite this, they still expect that three of four borrowers who get funding via the new loan would otherwise have gone through the FHA.
That could dent the FHA’s numbers and put more pressure on the agency to lower premiums again, though they recently said such a move was not in the works.
Bank of America only made a reported $1.36 billion in FHA loans, last year, per data from Inside Mortgage Finance, dropping to 22nd place among FHA lenders. The bank had been in the top 10 before pulling back.
Frequently Asked Questions
Where can I get the Affordable Loan Solution mortgage?
It is available in all of Bank of America’s sales channels, and you can apply at one of 4,700 financial centers nationwide, online, or by phone.
Do I have to be a first-time home buyer?
No, but if you are you must participate in home buyer education through Bank of America’s network of housing counselors.
Can I use this loan program to finance a second home or investment property?
No, applicants must occupy the property being financed.
Are reserves or down payment required?
You may use secondary financing, including second mortgages or a grant, and reserves aren’t required in most cases.
Can I get approved with non-traditional credit?
Yes, Bank of America will consider applicants with non-traditional forms of credit to document acceptable credit history.
What is the maximum loan amount?
$417,000, the conforming loan limit.
Are there income requirements?
Yes, income cannot exceed 100% of the HUD median income for the area.
Will Bank of America keep the loans?
No. They will sell them and the servicing rights immediately to Self-Help’s designated specialty servicer.