Testing a New Mortgage Idea: a 3% Down Payment!

Could we buy a Monrovia home like this with only a 3% down payment?

Last week brought an announcement­­ that should get the attention of a large segment of would-be home buyers­­—particularly those­­ who have been stymied by the difficulty of trying to build their credit scores by paying all the monthly bills on time while simultaneously saving up a pile of cash for a down payment.

For too many Monrovia nine-to-fivers, the two ambitions are achievable—just not at the same time. Although inflation hasn’t been horrendous, even a modest degree of rising prices causes a crunch for those whose incomes are flat. For many Americans, coming up with the down payment has been an immovable stumbling block.

Into the breach came last week’s bank announcement of a new mortgage product. Cutting to the chase, these home loans will be structured to allow qualified homeowners to make down payments of as little as 3%.

Yes, 3%!

If you don’t believe there’s ever any free lunch, you may be wondering why, if this makes sense to a bank, it hasn’t been offered until now. The answer has to do with the way the FHA regulates home loans.

The Federal Housing Administration insures banks against defaults on FHA-backed mortgages (they allow down payments of as little as 3.5%) but sometimes holds the banks responsible when borrowers fail to repay. In fact, the FHA won billions in settlements in recent years when bank paperwork turned out to be inaccurate. The banks were not pleased: they said many of the errors were minor. They also decided to cut back on offering FHA loans. That had the effect of slowing the residential real estate market across the U.S.—and San Gabriel Valley was no exception.

This new home loan structure is the bank’s solution for “families of modest means”—a group everyone agrees has been left out in the cold. It avoids FHA rules by avoiding the FHA altogether, instead relying on the backing of Freddie Mac and a nonprofit fund. Among the guidelines for the new low down payment product are requirements that borrowers have credit scores of at least 660 (FHA allows 580) and incomes that are lower than the area’s median. Because there will be no requirement that borrowers pay for private mortgage insurance, the loans should be less expensive than corresponding FHA mortgages. Great deal!

It remains to be seen how widely available such loans are going to be for Monrovia borrowers. This major bank will at first be capping the number of loans it issues while it tests the market. But it’s a sure thing that other national lenders will be watching what happens…and very likely rolling out their own low down payment products. It should be one answer for folks who have proved they are deserving and responsible—yet have found themselves closed out of the market.

As the spring selling season heats up, many potential opportunities also open up for sharp-eyed prospective buyers. If you are one, I’m standing by to help!