It seems just about everyone is lowering mortgage down payment requirements to deal with rising home prices, this despite the near-record low mortgage rates still widely available.
You see, down payment is still the biggest hurdle to homeownership, and I suppose it was during the previous boom as well. That would explain why zero down mortgages were the norm back in 2006.
The major problem then was that you could also state your income, your assets, and not disclose your job, so long as you had a decent credit score. No skin in the game and no disclosure equals no good.
We’ve learned from those mistakes, I hope, and now underwriting is a lot more sound. Still, people want to buy homes, whether they’ve saved up a large down payment or not. And that would explain why Fannie and Freddie began offering 97% LTV mortgages.
Building off those programs are mortgages with grants that still give the homeowner a 3% down payment, but without the borrower actually having to come up with the three percent in funds.
Instead, many lenders are providing a 2% grant to homeowners and asking that they come up with the remaining one percent, which seems pretty fair.
The use of a grant is allowed under both Fannie’s HomeReady program and Freddie’s Home Possible Advantage, and some banks dole outs funds in accordance with the Community Reinvestment Act.
Quicken Loans 1% Down Payment Option
Interestingly, the largest non-bank mortgage lender in the country, Quicken Loans, quietly rolled out their 1% down payment option back in March, but there wasn’t a press release or any fanfare. There certainly wasn’t a Super Bowl commercial.
I don’t know why that is; I’m just here to tell you about the loan program in case you lack a down payment and are interested. If I had to guess, I’d say that it’s limited to certain types of buyers and thus a national rollout or major ad campaign might be misleading and/or a waste of money.
Anyway, let’s talk about Quicken’s 1% down loan program to see if you might qualify based on what I know about it.
First off, this program can only be used for the purchase of a home, no refinances are permitted. Quicken Loans provides a 2% grant and the borrower brings in the remaining 1% to make it a 97% LTV loan.
I’m not sure if the grant has to be paid back if the borrower sells or refis before a certain period of times passes. Inquire with Quicken about that.
Secondly, the property must be a one-unit owner-occupied property, which includes single-family homes and condos (and townhomes), but not co-ops.
When it comes to credit, the minimum FICO score required is 680, which is considered average (or perhaps a bit below average). So it’s pretty flexible in terms of creditworthiness.
Perhaps more importantly, you must make less than or equal to the median income for the county in which you’re purchasing the home. If the income limit is $75,000, you must earn that or less to qualify for the 1% down payment program.
Speaking of income, the maximum DTI ratio is 45%, which is standard.
Quicken’s 1% Down Might Not Require Any Funds from the Borrower
If there aren’t any additional overlays on this program versus the ones offered by Fannie and Freddie, no minimum borrower contribution is required, meaning the down payment funds and any reserves can be gifted.
The Quicken program also comes with a free “introduction to homeownership” course that is required for first-time home buyers, but available to everyone at no cost.
When it comes to loan types, you’re likely going to be limited to fixed products with a 30-year amortization. Put simply, probably the 30-year fixed unless you can afford and desire a 15-year fixed. That wouldn’t really make sense for someone lacking a down payment.
There will be mortgage insurance, seeing that the loan is well north of 80% LTV, but it might be at a reduced rate as it is via the Fannie/Freddie 97 programs.
I have no idea what the mortgage rates are like, but I assume higher than what you see advertised to account for the higher risk of putting just one percent down. But seeing that rates are so low at the moment, they’ll probably still look pretty favorable.
For the record, Quicken is just one of many lenders out there offering grants to home buyers to push the down payment requirement down to just 1%, so you can always shop around to compare different interest rates and program requirements by lender.
The mortgage market is changing rapidly to account for higher home prices. So take the time to compare all options, including FHA loans, to see what the best fit is for your situation.