New Mortgage Programs and Their Impact

America’s top home lending banks have made a ton of headlines lately as they have been dealing with non-Federal Housing Administration (FHA) low-down payment programs. The banks are JPMorgan Chase, Quicken Loans, Bank of America, and Wells Fargo. What are these programs? And do they change the game of credit availability for the next while?

Each bank has their own version of the same thing. Wells Fargo’s your First Mortgage, Bank of America’s Affordable Loan Solution, JPMorgan Chase’s Standard Agent 97%, and Quicken’s 1 percent down payment plans are essentially the same plan, just with minor variations of company policy. These are appealing to first time home buyers and low to moderate income borrowers who may not have enough for a down payment on a home, or have less than average credit scores. Each bank also has their own credit score minimum: Wells Fargo – 620, Bank of America – 660, Chase and Quicken – 680.

Borrower friendly features

The cool thing about these programs is they are friendly to the borrower. They come with features that allow the combination of down payments with gifts and grants, homebuyer counseling, consideration of nontraditional forms of credit, and no PMI under Bank of America’s program. Bank of America and Wells Fargo flirted with selling their loans to Fannie Mae and Freddie Mac, respectively. Self-help groups like Self Help Credit Union, which is a nonprofit, offers help for first-loss risk coverage in lieu of PMI, which saves the borrower a ton of cash. Quicken offers its clients 2 percent grants and then sells the loans to Fannie and Freddie under its Home Possible advantage program, which does require PMI. On the other hand Chase will sell to Fannie and Freddie, but it is unknown of they require PMI.

Not identical, but similar

The two most popular programs are Bank of America’s and Wells Fargo’s. They have a lot of structural similarities like first-loss risk sharing and alternatives to PMI. As alike as they may seem, there are still a lot of differences.

Wells Fargo’s Your First Mortgage combines various low-down payment programs into a single product and minimizes the complexity and lets borrowers to compare conventional and FHA loans with ease. For myself I know looking through a ton of options can be overwhelming, so that is a draw to some buyers, as well as first timers. Once a borrower is confirmed Wells Fargo digs through back-end programs to sell the loan to, offered in secondary markets by Fannie Mae and Freddie Mac.

Bank of America’s ALS is a finer affordable program that strictly works with self-help’s coverage. The volume of ALS will likely be smaller due to the scarce of nonprofit capital. The two main differences between ALS and Your First Mortgage are: Bank of America plans on selling servicing of all ALS loans to a particular servicer, gaining no interest and deflecting risk in the loan. Wells Fargo intends to retain servicing in a house, suggesting financial interest in your success of the program. They also offer a 1/8 percent rate deduction for completing a course in buying a home, while the others just offer counseling.

Will these programs improve credit availability?

Today’s buyers are quite reliant on FHA for their mortgage needs, but a lot of lenders have strayed away from FHA lending because of the increased risk of enforcement. The new programs that don’t rely on FHA are some creative attempts to increase lending to smaller borrowers.

Even though they are gaining popularity, they will most likely never become substitutes for FHA lending for a couple reasons. There’s a sharp shortage of nonprofit capital to support lending volumes n across the country. The second reason is FHA’s large price advantage over conventional lending across the credit spectrum. All in all, the more lenders work to lend more to smaller borrowers the more it will cost them. For this to work for a small time borrower, they must offer greater savings to them.

We are not saying these programs are a scam or aren’t helpful. A lot of people benefit from these programs, most of which truly need the assistance due to their economic situation. They have found success in them because of the recent cut in PMI premiums, but most of it coming from the borrowers with above average credit. Loans from Self-Help which don’t need PMI reduce your monthly mortgage expense. Fannie and Freddie also offer reasonable programs that reduce your PMI requirements. Likewise, your First Mortgage’s 1/8 percent rate incentive, even as small as it is, still helps. This is all brand new to the market so there are still kinks to be worked out as the market goes.

Take advantage of these programs if you need help and get yourself in the market. It’s always a good plan to have a piece of real estate, just know what you’re doing and find the right house and all will be well.

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