Two major lenders in the nation have introduced 1% down payment mortgage programs, aiming to assist homebuyers who struggle to save for a down payment. While these initiatives have garnered attention, experts are cautioning against the potential risks associated with such low down payment loans. This article will explore the benefits and drawbacks of 1% down mortgages, shedding light on the considerations homebuyers should keep in mind.
The Rise of 1% Down Payment Mortgages:
Recently, United Wholesale Mortgage and Rocket Mortgage unveiled mortgage programs that require only a 1% down payment. United Wholesale Mortgage contributes an additional 2% of the home’s sale price, capped at $4,000, while Rocket Mortgage has no limit. These loans primarily target lower- and moderate-income borrowers and are subject to income restrictions. However, industry experts advise that borrowers, particularly those with limited savings, should be cautious when considering these loans due to potential risks.
Potential Risks for Borrowers:
One significant concern associated with 1% down payment mortgages is the possibility of owing more on the mortgage than the home’s value, especially in areas experiencing falling home prices. This situation can arise if borrowers don’t make larger down payments. Additionally, borrowers should be aware that homeownership expenses extend beyond the mortgage payment, including maintenance costs, repairs, and unexpected emergencies. Those with limited equity might struggle to cover these expenses, potentially putting their homes at risk. Moreover, borrowers who lack personal savings and opt for minimal down payments might face difficulties should they encounter financial challenges or if property values decline, as they would have less to fall back on.
Comparison to Other Low or No Down Payment Loan Options:
While 1% down payment mortgages may seem unique, it’s important to note that similar loan programs exist. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loans require no down payment and cater to specific groups, such as active military, veterans, and those buying property in rural areas. Borrowers with qualifying credit scores can also obtain government-backed loans with as little as 3% down payment or Federal Housing Administration (FHA) loans with just 3.5% down payment. Many of these borrowers receive down payment assistance from various government sources. Therefore, the personal contributions required may be less than the minimum down payment.
Eligibility and Loan Details:
Not everyone qualifies for 1% down mortgages. Buyers must meet certain criteria, including a minimum credit score of 620 and earning no more than 80% of the area median income. Rocket Mortgage borrowers must purchase a single-family home, while United Wholesale Mortgage’s 1% down loan is available exclusively through mortgage brokers. Rocket Mortgage borrowers are exempt from monthly private mortgage insurance (PMI) payments, as the lender covers this cost in a lump sum at the time of loan origination. While some industry experts speculated that higher mortgage rates or fees might compensate for down payment assistance, both lenders assert that the rates and fees for these loans are equivalent to those for higher down payment mortgages.
Mitigating Another Housing Crisis:
While concerns about 1% down payment mortgages triggering another housing crash have been raised, it is important to note key differences between these loans and the lending practices that contributed to the 2008 recession. Borrowers’ financials are meticulously evaluated, requiring high credit scores, low debt, and sufficient income to meet monthly mortgage payments. Furthermore, these mortgages do not balloon or adjust with changing interest rates; they are fixed-rate loans spanning 30 years, offering stability and predictability.