A credit union out of Cheyenne, Wyoming has launched a crowdfunded, zero down mortgage loan for its customers.
It comes at a time when still sky-high home prices and extremely elevated mortgage rates are severely eroding affordability.
During challenging times like these, it’s not uncommon for unique programs like this to surface.
We’ve also seen the return of buydown loans that reduce interest rates for the first year or two of the loan term.
What makes this new offering more interesting is that other customers can get in on the action and earn higher yields on their deposits.
The No Money Down Mortgage at Blue
First it was Bank of America’s zero down mortgage, and now it’s “The No Money Down Mortgage at Blue.”
Yes, I’m referring to a new pilot program that offers zero down mortgages from Cheyenne, WY-based Blue Federal Credit Union.
While not quite as large as BofA, they still describe their new zero-down product as a “game-changing” mortgage.
Blue says it has a “twofold plan” to deal with rising home prices and the inability to save for a 20% down payment.
They say first-time home buyers can obtain 100% financing on a purchase (no down payment) without being subject to the pesky private mortgage insurance (PMI).
PMI is typically required for loans above 80% loan-to-value (LTV).
Of course, as I always say, if it’s not being charged, it’s likely just baked into the interest rate in a different way.
Anyway, that could theoretically keep monthly payments a little more reasonable, as PMI is an additional monthly cost on top of principal, interest, taxes, and insurance (PITI).
But the more interesting piece of this innovative loan program is that other members of the credit union can be the bank.
Now Your Neighbor Can Fund Your Zero Down Mortgage?
Yes, this is a crowdfunded zero down mortgage, with qualified members of the credit union able to “pledge into the program.”
The pledged funds are pooled together and used to cover the lack of a down payment as additional collateral.
In return, these pledgers receive a higher interest yield than what otherwise might be available via a standard CD or savings account.
We know savings rates have been horrible for some time, though they have recently increased somewhat.
I actually received an email recently celebrating the fact that my APY rose to 2%. Not fantastic when inflation is running above 8%, but I digress.
Anyway, these pledgers will receive an interest rate of prime minus 1.25%, which adjusts monthly. It’s a five-year term, though interest earned can be withdrawn during that time.
At last glance, that means an interest rate of 5%, which sounds pretty good. There’s just one little thing.
There is a risk of loss on those pledged funds if the underlying mortgage is defaulted on.
However, to offset some of that risk Blue will cover 80% of any loss that occurs on the mortgage.
The remaining 20% of the loss will be proportionality divided among all the pledgers.
Blue does say the home loans are subject to its “high underwriting standards,” and in fact are “higher than usual” to protect all those involved.
I’m just a little weary of these no down payment loans coming at a time when home prices are shaky and mortgage rates are double what they were just a few months ago.