The big banks are now making it easier to scrape that down payment together. Just a few months after Bank of America announced a 3% down payment program, Wells Fargo is doing the same.
3% Down Payment Programs
Wells Fargo launched the new “Your First Mortgage” program at the end of May. This comes at a time when other big banks seem to be shying away from FHA loans, following a wave of lawsuits by the Justice Department alleging poor underwriting.
As you may recall, Wells Fargo settled for a $1.2 billion settlement with the government in April for allegedly submitting FHA loans that had errors. J.P. Morgan Chase, Bank of America, SunTrust and many other lenders have also been penalized or threatened to be penalized recently for FHA-related issues.
According to the Wall Street Journal, some executives have said the penalties are too harsh for what they describe as minor errors, while government lawyers have said they have been appropriately high and that some lenders’ actions even amounted to fraud.
Not surprisingly, Wells Fargo, like other banks, have scaled back on FHA-loans. In fact, the bank’s loan volume accounted for just 2.5% of total FHA mortgage dollars originated in 2015 (about $6.3 billion dollars), down from 9% in 2013 and 13% in 2010, according to Inside Mortgage Finance.
The Wall Street Journal says the bank’s new program, which was launched through a partnership with mortgage-finance giant Fannie Mae, could replace about half the bank’s current FHA volume.
Borrowers can apply for a fixed-rate loan up to $417,000 with as little as 3% down and a credit score as low as 620. That FICO score may sound uncomfortably close to subprime levels. Are we repeating the recent past?
Wells Fargo tells Housingwire that, “We feel we have a strong balance of risk and opportunity for homeownership.” The San Francisco-based bank says the program is designed to help first-time homebuyers and people with low to moderate incomes.
This program offers more flexibility in loan qualification as well. Borrowers can have slightly higher debt loads, and they can include income or rent payments from other household members to help get their income numbers where they should be.
Private mortgage insurance (PMI) will still be a requirement, but borrowers can choose to wrap it into the mortgage payments or to pay it monthly until the loan-to-value drops below 80%. This is a far better option than FHA loans that do not remove the PMI even if there’s 20% equity in the property.
And if the borrower wants to cut another 1/8% off their interest rate, they can take a homebuyer education class.
The program at Wells Fargo is slightly different than the one launched by Bank of America in February. Under the BofA program, borrowers are also allowed to put as little as 3% down on the loan, but unlike Wells Fargo and the FHA, they do not have to have mortgage insurance.
The FICO score needs to be a little higher though. The minimum for BofA is 660, instead of the 620 FICO score accepted by Wells Fargo and the FHA. BofA doesn’t require mortgage insurance, but a homebuyer’s education class is required for people buying their first home.
Wells Fargo is partnering with Self-Help Ventures Fund and Fannie Mae. Bank of America is partnering with Self-Help Ventures Fund and Freddie Mac. Neither program is associated with the Federal Housing Administration.
So you can see that they are similar, with differences that cater to slightly different groups of homebuyers.
And as two dominos fall, a third follows. Not long after Wells Fargo announced it’s 3% down payment lending program, JP Morgan Chase did the same thing.
Chase didn’t launch the program with a lot of fanfare however. HousingWire reports that mortgage industry insider Rob Chrisman spotted the new program and was the one revealing the details.
The Chase program is called the “Standard Agency 97%”. It’s designed for first-time homebuyers who can only afford a 3% down payment. But the lending standards are more stringent than Bank of America and Wells Fargo.
Loan applicants must have a FICO score of at least 680 and at least one customer must be a first-time homebuyer.
Chase also offers other low down payment programs. There’s one called “DreaMaker Mortgage”. That requires a 5% down payment and is limited to people with lower FICO scores and lower income levels.
The news from JP Morgan Chase is surprising after CEO Jamie Dimon recently said, “It’s simply too costly and too risky to originate these kinds of mortgages.” But Chase was apparently not going to stand on the sidelines, as Bank of America and Wells Fargo scooped up loans in this income bracket.
Dimon is now saying that for many customers, the buying of a home is the biggest purchase they’ll make and is often very important emotionally. He says, “As a bank that wants to build lifelong relationships with it’s customers, we want to be there for them at life’s most critical junctures.”
Are low-money-down loans risky?
Some people think so, but normally people don’t walk away from their mortgages because they put zero down, 3% down or even 20% down. They walk because they can’t make the payment – usually because they face some kind of crisis like job loss, divorce or illness.
Plus, mortgage payments in most of the U.S. are far lower than rents, so there would be no incentive to lose the property – especially with home prices on the rise.