The nation’s leading mortgage lender, United Wholesale Mortgage, has re-launched the 1% down payment home loan.
It comes at a time when housing affordability continues to be pressured by high asking prices and equally high mortgage rates.
While it may be seen as a boon to prospective buyers, it will surely have its critics as well.
Like other low-down payment programs, it targets those with lower incomes who would otherwise struggle to qualify for a home purchase.
It’s reminiscent of the frothy days in the early 2000s, when creative financing allowed high home prices to persist.
The Return of Conventional 1% Down
Home loans backed by Fannie Mae and Freddie Mac, known as conforming loans, typically require a 3% minimum down payment.
But the re-launch of this loan program, known as “Conventional 1% Down,” requires just a 1% down payment from the borrower.
For example, a $200,000 home purchase would require just $2,000 from the buyer.
And UWM would chip in the other 2%, $4,000 in this example, to put the loan-to-value (LTV) ratio at the minimum 97%.
This would technically make the loan a 3% down mortgage set at 97% LTV, thereby qualifying for backing by Fannie Mae or Freddie Mac.
It would also lessen the burden of coming up with a down payment, often a roadblock for home buyers.
Proponents will argue that it allows would-be buyers to get into a home sooner, instead of waiting to save for a larger down payment.
Those against it will argue that such financing is too accommodative, and that those who can’t squirrel away the minimum down payment should wait to buy a home.
This is further exacerbated by the fear of falling home prices, which could quickly land borrowers in negative equity positions.
While that may sound familiar to the previous housing run-up, one glaring difference between now and then is that borrowers are fully-underwritten today.
Back then, borrowers were often qualified via stated income and came to the closing table with very little (or no money) down.
Who Qualifies for a 1% Down Payment Mortgage?
- Home buyers that make 50% or less of area median income
- Borrower must put down at least 1% of purchase price
- UWM will offer 2% of purchase price up to $4,000 max
- Minimum FICO score of 620 required
- Follows guidelines of Freddie Mac’s Home Possible
- Loan will be 97% LTV backed by Freddie Mac
As noted, there are income limits on this new program. Namely, it’s an option for borrowers with income at or below 50% of the Area Median Income (AMI).
It’s also limited to home buyers (no refinances) and those purchasing an owner-occupied property qualify.
That means no investors or second home purchases, aka speculators, but condos and other 1-unit properties should qualify.
Because it follows the guidelines of Freddie Mac’s Home Possible, a minimum FICO score of 620 is likely required.
Those interested must use a mortgage broker, as UWM is a wholesale lender, meaning they don’t work directly with the public.
While the down payment hurdle will effectively be cleared, borrowers will still have to contend with much higher housing payments.
This is the result of still-high asking prices coupled with mortgage rates that have doubled in the span of a year.
The 30-year fixed is currently priced around 6.5%, up from closer to 3% to start 2022.
Is This What the Housing Market Needs Right Now?
Ironically, the Fed has been raising its own fed funds rate to curtail housing demand, but lenders have ramped up affordability options at the same time.
This has kept the housing market perhaps too competitive, thanks to an ongoing dearth of supply.
Take the ‘California Dream For All’ Home Loan that allows home buyers in the state to purchase a property without a down payment.
That program sold out in about a week due to unprecedented demand. In that case, homeowners sacrifice future appreciation for a zero down home mortgage.
This new 1% down payment option can likely be emulated by other lenders too, so it could mark a return of the offering industry-wide.
As a result, the housing market may continue to run hot despite affordability gauges signaling stress.
In the third quarter of 2022, Pontiac, Michigan-based United Wholesale Mortgage (UWM) became the nation’s largest mortgage lender, beating out cross-town rival Rocket Mortgage.
They’ve still yet to beat out Rocket an annual basis, though that could be in the works.
UWM is holding a hiring event this weekend in a bid to hire 500 new employees at a time when other lenders are closing their doors.