The home mortgage market is loosening up with a major lender gaining national attention for loans designed with low down payments to allow cash strapped, first-time buyers access to financing.
Bank of America announced last week that it would begin offering 97 percent financed home loans —up to $417,000— to applicants with credit scores in the mid 600s who also fall below their area’s median income levels as determined by the Federal Housing Administration.
Also, the loans would not include private mortgage insurance — a safeguard for lenders and the governmental agencies that insure home mortgages. Private mortgage insurance can add hundreds of dollars to a mortgage payment and must be carried until the debt to equity level reaches 20 percent.
On a $150,000 house, a borrower would need to put down $30,000 to qualify for conventional home loans that don’t require mortgage insurance.
Bank of America will sell the loans to Self Help Ventures Fund with the loans being backed by Freddie Mac, according to information supplied by the bank.
While social media and some national news agency’s reported the resurgence of these types of loans last week after BOA’s announcement, Jacksonville professionals in the home mortgage industry told the Business Journal these programs never vanished from the market place and, in fact, some programs offer 100 percent financing in certain areas of Jacksonville.
Jon Singleton, a Realtor with Watson Realty Corp., lives in Jacksonville and has sold homes for the past 15 years in the area. He said low downpayment programs have been around for years, usually being offered as an FHA-backed product with 3.5 percent down payment.
He said these types of loans are good for buyers that are renting now but want to buy a house and haven’t saved enough for a conventional mortgage.
However, there are disadvantages to low down payment programs, especially if home values decrease. Borrowers may become stuck and not able to sell the property, he said.
Even borrowers who do put down 20 percent can become underwater as closing costs can tack on 8 to 10 percent to the loan, he said.
Jim Branch, a vice president at Regions Mortgage, said they offer a 100 percent financing program in certain areas of Jacksonville. He said these types of programs have been mandated by the federal government since the Clinton Administration to help expand the opportunities in the housing market.
“What I see today is more products and more creativity,” he said. “But also more scrutiny.”
David Wakefield, a loan originator with PrimeLending, said there were several products that are designed for first-time home buyers. One program provides borrows Duval County residents $15,000 through the Florida Bond Program as the county is considered one of the hardest hit areas in the last downturn. The bond, he said, would be forgiven after five years.
The major lending product that was blamed for the last crash of the economy was subprime loans that had adjustable interest rates, causing a spike in monthly payments when the economy declined.
Wakefield said as the mortgage market continues to loosen, he’s hearing whispers that these types of products could be soon offered again.
“People forget,” Wakefield said. “It’s a convenient memory loss.”