In the face of affordability challenges that deter many potential homebuyers, the two largest mortgage lenders in the United States have introduced innovative programs that allow borrowers with modest incomes to qualify for a loan with only a 1 percent down payment. Rocket Mortgage and United Wholesale Mortgage have leveraged Fannie Mae's HomeReady mortgages and Freddie Mac's Home Possible loans to create their respective programs. These initiatives come at a time when home prices are soaring, and mortgage rates have significantly increased over the past two years.
Rocket Mortgage's ONE+ Program:
Rocket Mortgage, the largest lender in the U.S. as of 2022, recently unveiled its ONE+ program, designed to assist homebuyers in overcoming affordability hurdles. Under this program, Rocket Mortgage covers 2 percent of the 3 percent down payment required for a HomeReady or Home Possible mortgage. The borrower contributes the remaining 1 percent. To illustrate, imagine a buyer purchasing a $500,000 home. With the ONE+ program, Rocket Mortgage grants $10,000 (2 percent) toward the down payment, leaving the borrower responsible for only $5,000 (1 percent). Additionally, Rocket Mortgage covers the cost of private mortgage insurance (PMI), which is typically the borrower's responsibility when the down payment is less than 20 percent. Private mortgage insurance is about .5 - 1.5% of the originally loan amount, so this is another substantial savings!
United Wholesale Mortgage's Conventional 1% Down Loans:
United Wholesale Mortgage, the second-largest lender, launched its Conventional 1% Down loans in April, aligning with the guidelines of the HomeReady and Home Possible programs. The lender contributes 2 percent of the purchase price, up to $4,000, thereby limiting the maximum down payment benefit to $200,000. For example, a borrower taking a $400,000 loan under this program would receive 1 percent from United Wholesale Mortgage and need to provide the remaining 2 percent.
Income Limits and Potential Drawbacks:
To qualify for the 1 percent down programs or any HomeReady or Home Possible loan, borrowers must have incomes below 80 percent of the median income in their respective areas. It is important to note that these programs may change over time, as seen with United Wholesale Mortgage's decision to increase income limits. Furthermore, borrowers should consider the potential risk of owing more on their homes than they are worth, particularly in a declining housing market. However, it is worth mentioning that the current mortgage market and housing sector are much stronger than during the Great Recession, and underwriting criteria, including debt-to-income ratios, remain stringent.
Alternative Options and Creative Solutions:
Recognizing that down payments pose a significant hurdle to homeownership, lenders have introduced various low- and no-down payment loan options. Apart from HomeReady and Home Possible loans, the Federal Housing Administration (FHA) offers loans with a minimum down payment of 3.5 percent for borrowers with credit scores of 580 or higher. The U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) also provide loan programs with no down payment requirements for eligible borrowers, catering to specific groups such as veterans, active-duty service members, and residents of certain rural areas.What's the Catch?
While the 1% down payment mortgages offered by Rocket Mortgage and United Wholesale Mortgage provide an attractive opportunity for homebuyers with modest incomes, there are some potential downsides to consider:
1. Market Risks: These programs carry the risk of borrowers owing more on their homes than they are worth. If home prices decline significantly, borrowers who put down just 3% may find themselves in a situation where they owe more on their mortgage than the value of their property.
2. Lender's Discretion: The terms and availability of these programs are subject to the discretion of the lenders. There is no guarantee that the programs will remain the same or be available indefinitely. Lenders may modify or discontinue the programs based on market conditions, profitability, or other factors.
3. Potential Costly Features: While the down payment assistance is generous, it can be costly for the lenders. If the lenders find these programs financially burdensome, they may choose to make changes that could increase costs for borrowers, such as introducing fees or altering the grant amounts.
4. Income Limits: To qualify for the 1% down programs or any HomeReady and Home Possible loans, borrowers must meet income limits, which vary depending on the area. This requirement may exclude some potential homebuyers whose incomes exceed the prescribed limits.
5. Potential for Private Mortgage Insurance (PMI): While Rocket Mortgage covers the cost of PMI under its program, borrowers who participate in other 1% down payment programs may still be required to pay for PMI. This additional expense can add to the overall cost of homeownership.
6. Declining Affordability: Despite the 1% down payment, homeownership costs extend beyond the initial down payment. Homebuyers need to consider other expenses such as closing costs, property taxes, homeowners insurance, maintenance, and ongoing mortgage payments. It is crucial to evaluate whether the affordability of homeownership is sustainable in the long term.
It is essential for prospective homebuyers to carefully weigh the benefits and drawbacks of these programs and consider their individual financial circumstances before committing to a mortgage. Consulting with a trusted mortgage advisor or financial professional can provide valuable guidance in making an informed decision.
In an era of soaring home prices and increasing mortgage rates, the 1 percent down mortgage programs offered by Rocket Mortgage and United Wholesale Mortgage provide a viable path to homeownership for borrowers with modest incomes. While these programs offer considerable benefits, borrowers should be mindful of potential market fluctuations and ensure they meet the income criteria. As the mortgage industry continues to respond to the challenges of affordability, creative solutions and alternative loan options are emerging, aiming to support prospective homebuyers on their journey to owning a home.