Of course a 1% down payment loan sounds wonderful, but what’s the catch? There are a number of caveats for who can even take advantage of these programs.
Both loans require you to have an income at or below 80% of the median income in your area. A minimum credit score of 620 is also necessary. ONE+ is also only available to homebuyers purchasing single-family units.
Now of course the benefits of the new loan to buyers are pretty obvious. If you’re purchasing a $350,000 home through ONE+, for example, you don’t have to pay $70,000 to meet the 20% threshold to eliminate the need for loan insurance. You don’t even have to reach the $10,500 required for the 3% threshold. Instead, you would put down just $3,500. This could help a borrower improve their cash flow, preventing them from going under quickly.
Seeing mortgages with such low down payment requirements may remind market watchers of the 2008 crisis, where borrowers received loans they eventually were unable to pay. Poor underwriting practices were a big part of the problem, according to the International Monetary Fund.
Walters insists his company’s requirement borrowers meet specific credit standards acts as a safeguard against the same pitfalls.
“We are not reducing the qualifications and putting people into loans they can’t afford,” Walters told MarketWatch.
“While a program like this isn’t going to solve the supply problem in America, what it does is level up some of the folks who really are struggling in a market that’s often competitive, and where prices have risen,” he added.
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These mortgages may reduce upfront costs, but the question remains, how long would it take borrowers to pay back such a loan?
Sure, you’ve paid 1% down on a home, but mortgage interest rates remain high. The average 30-year fixed rate climbed to 6.57% this week.
It’s clear what Rocket Mortgage and UWM are getting out of this scenario. Borrowers will be locked in at high rates. What’s more, it will likely take longer for them to pay off these mortgages given the target consumers are low-to-moderate income earners.
Yet, if you’re desperate for a home, these loans could still provide you with savings in terms of keeping cash in your pocket upon purchase. Furthermore, the 2% coverage provided is considered a “grant,” so you don’t have to pay that back.
At the end of the day, it’s always a good idea to meet with your financial adviser before agreeing to anything, especially a mortgage that could see you owe your hard-earned income for decades.
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