Unique loan provides no income threshold for underserved homebuyers – Orange County Register
A unique low-entry mortgage can be a salve to Southern California’s high home prices and offer an option that most affordable home loan programs fail to address.
The loan, a first I’ve seen, is offered by Community Development Financial Institutions and doesn’t care what applicants look like or where they want to live. The combined minimum loan amounts range from $150,000 to a maximum of $3.5 million. (The first credit limit is $3 million and the second is $500,000).
As long as the borrower has at least a 15% down payment on an owner-occupied home or condo, a median FICO score of at least 680, and some home payment reserves, they may just be able to buy an apartment to call home.
Buyers beware: Mortgage rates are high though, in the 7% to 8% range.
The income portion of this particular mortgage application is a blank slate. Casual, intermittent, or transitional employment (e.g., due to COVID), cash companies, retirees, seasonal or gig workers, and even new immigrants may qualify. Proving repayment ability is a false start. This is NINJ (no income, no job) with a small down payment.
Today’s mortgage standards are not designed for borrowers with exceptional or atypical income sources to pay monthly home payments. The traditional home finance structure is a tight, complicated institutional underwriting box. If you don’t fit in the box, too bad. Every day across America, potential homebuyers are denied access to mortgages because they fail to meet the government’s litmus test standard for ability to repay.
These systematically unqualified buyers are forced to rent and often pay top dollar. Don’t worry about their income. There are no official regulations for landlords to demonstrate income qualification or the ability of tenant applicants to pay monthly rent. Qualified applicants with no income sign leases any day, as long as they have the upfront funds to satisfy the landlord.
Those who cannot pay often face eviction. So what is the difference between this and an unqualified home loan?
Most family wealth stems from or begins with home ownership, mortgage debt payments, and payouts. With no money in hand, raising new family wealth in America is difficult, especially when traditional credit approvals are unattainable.
The US Treasury Department-authorized community development financial institutions, two of which offer this loan, are exempt from certain consumer financing rules and regulations (such as proof of ability to repay). The big idea is to find different ways to expand economic opportunities like home ownership for the unserved and underserved.
Here is an example of how the Community Development Loan works:
A buyer lands a house at the median price of $797,000, which is a 15% discount or $119,550. To avoid mortgage insurance, the first mortgage is $597,750 and the piggyback loan is $79,700 for a total of $677,450. Both loans in this example have a 30-year term with a fixed interest rate and can both be interest-free for the first 10 years. After 10 years, borrowers still have 20 years to amortize and pay off the loans.
Assuming a FICO score of 740, the interest-free first loan payment at an interest rate of 7.25% is $3,611. The second interest-free loan payment at 8.5% is $565. Monthly property taxes are $830 (assuming a 1.25% tax rate) and homeowners insurance is estimated at $175 per month. The total monthly payment is $5,181.
In addition to payment, this first credit would cost approximately 1,625 points or $9,713, while the second would cost 1 point or $797. In addition, there are settlement fees such as escrow, title, valuation, and underwriting. The buyer is expecting approximately $17,000 in total points, hard costs and escrow seizures. In this example, they also need three months of house payments in reserve, or $15,543. The down payment, closing costs and payment reserve add up to $152,093.
It should be noted that the deposit and closing costs may be a gift. The home savings must come from the borrowers’ own money. Reserves must be present in the borrower’s account for at least one month.
Black or Hispanic applicants receive a quarter percent rebate on the first loan interest but not the second. All told, the house payment in the example above would be $156 lower at a 7% interest rate.
This loan option, with slightly different terms, also includes refinance and cash-out refinance as well as second homes and investment properties.
With only a 15% down payment and the ability to do little more than fog a mirror to get in, some people might naively buy and not be able to keep up with the payments, and eventually see the house and down payment through Lose Foreclosure? Of course.
So no, it’s not a perfect system. But it gives a borrower who has a few shekels and decent credit the benefit of the doubt in this imperfect world of mortgage financing. Locking people up is better than excluding them.
Freddie Mac evaluates news
The 30-year fixed rate averaged 5.1%, fifteen basis points lower than last week. The 15-year fixed rate averaged 4.31%, 12 basis points lower than last week. The 5-year ARM averaged 4.2%, 12 basis points higher than last week.
The Mortgage Bankers Association reported a 1.2% decline in mortgage application volume from the previous week.
bottom line: Assuming a borrower receives the average 30-year fixed rate on a $647,200 conforming loan, last year’s payment was $803 less than this week’s payment of $3,514.
What I see: Locally, well-qualified borrowers can obtain the following fixed-rate no-point mortgages: 30-year FHA at 4.375%, 15-year conventional at 4.125%, 30-year conventional at 4.875%, 15-year conventional peak credit mortgage ($647,201 to $970,800) at 4.875%, a 30-year high conventional credit at 5.25%, and a 30-year jumbo purchase, fixed at 4.75%.
Note: The 30-year FHA-compliant loan is limited to loans of $562,350 in Inland Empire and $647,200 in LA and Orange counties.
Striking loan of the week: A 30-year adjustable jumbo mortgage that is locked in at 3.75% with 1 point for the first five years.