No money down mortgages? This California credit union welcomes them back – The Mercury News
No money down.
Three words that unnerve many real estate observers who wince at ugly memories of risky loans and the mortgage-making disaster of the previous decade.
Lending industry logic suggests the more money any borrower puts into a loan the more likely they’ll make the house payments. So why is Orange County’s Credit Union offering to finance homebuyers who put zero down?
Carlos Miramontez, the vice president for mortgage lending, says zero-down financing targets the house hunter with good credit history and a steady job but lacks the funds for a down payment. Often, it’s the classic first-time buyer.
Yes, Miramontez knows non-traditional lending like no-money-down mortgages helped create last decade’s housing bubble. But he also notes that many of the loan styles used in that risk-taking era were actually historically solid mortgage options … but only when prudently used by lender and borrower alike.
“We’re looking at sensible and responsible products that help solve affordability challenges,” he said.
So what is the 79-year-old institution, with 100,000 members and $1.5 billion in assets, doing to protect itself and its borrowing members?
This credit union serves a membership of people living or working in Orange and Riverside counties and parts of southern Los Angeles County. Their bottom line, the banker says, is finding house hunters who “have strong, stable finances who are stuck in the down payment conundrum” plus …
One: You better have a grand history of paying your bills. Those with credit scores below 720 – a modestly high-level – shouldn’t bother to apply.
Two: Can you prove your income? Full documentation for all forms of compensation is required for all borrowers.
Three: Do you have a steady job? You must be working in the same field for at least two years to be considered.
Four: Got cash? You need liquid reserves equal to at least two months of house payments.
Five: Have modest homebuying targets as they’ll only lend up to $500,000 on owner-occupied properties. Sadly, homes priced under that limit are somewhat rare in the region.
Six: No traditional fixed-rate deals. Rather, starting payments are fixed for anywhere between five years and 10 years. And pay as much as a half percentage-point more in loan fees.
Seven: Unlike government-sponsored low down-payment options, this mortgage has no income cap. It’s available to high-income households as well.
Miramontez insists the high bar for financial strength of the borrowers outweighs the no-down risks. And since the credit union will keep these loans on its books — no government or Wall Street securitization here — there’s plenty of internal motivation to do these the right way.
Since March, the credit union has completed six of these loans out of a total 300 mortgages the credit union made. Miramontez adds that many prospective borrowers come in seeking the no-money-down program, then choose other financing options.
Mortgages with small down payments seem like a mystery to many housing novices. One Realtor survey found seven of eight nonowners were unaware of products requiring down payments of less than 10 percent of the purchase price … even though the average down payment nationwide last year was only 11 percent.
“It’s no panacea; it’s not for everybody,” Miramontez says.
I know numerous people will read of this new loan and say “Here we go again!” with risky mortgage-making.
Yes, that age of stupid lending was truly regrettable. But the industry response — lenders’ ultra-conservative standards — exacerbated affordability challenges for many house hunters.
Bankers are less stingy these days, as the credit union’s new product shows. Loan tracker CoreLogic found that mortgages made in 2017’s first three months “have slightly higher credit risk than loans originated last year. However, the credit risk is about the same compared to the early 2000s,” an era before the risk-taking madness began.
Getting lenders to accept folks other than those with absolutely perfect financial stature – and take those risks wisely – is a deft juggle that’s key to the continued health of the housing market.
But, I’ll admit, I still gulp at the probability of overdoing it!