First-time buyers and low to moderate-income buyers have largely been sidelined by today’s housing recovery.
The common cry is too-tight credit. Lenders have kept the credit box restrictive because they are gun-shy from the billions of dollars in buy-backs and judicial settlements stemming from the mortgage crisis that they still face today. Now the nation’s largest lender, Wells Fargo, says it is opening that box with a new low down payment loan — a loan it claims is low-risk to the bank.
Branded “yourFirstMortgage,” Wells Fargo’s new product has a minimum down payment of 3 percent for a conventional ($417,000 or less), fixed-rate mortgage. Down payment assistance can come from gifts and community assistance programs. Customers are not required to complete a homebuyer education course, but if they do, they may earn a 1/8 percent interest rate reduction. The minimum FICO score for these loans, which are underwritten according to Fannie Mae standards, is 620. Mortgage insurance can either be rolled in to the cost of the loan or purchased separately by the borrower. The monthly payment is less than a government-insured FHA loan. More importantly, it’s simpler than other 3 percent down payment products already in the market, some of which have specific income and counseling requirements.
Wells Fargo will service the loans, but Fannie Mae will buy them, and that means the loans must be underwritten to Fannie Mae’s standards, which are high. Jonathan Lawless, vice president of product development at Fannie Mae, admits that a borrower with a 620 score would be unlikely to qualify.
“It is true that it’s a rare event that we see borrowers at that low a fico score,” said Lawless. “There needs to be compensating factors, one is to have a lot of money in the bank or a very good debt to income ratio.”
In other words, the borrower would have to have a very high income to negate the credit risk. Lawless does think that the Wells Fargo loan will be far more popular than others on the market because of the financial incentive for homeowner education, the lack of restrictions on funding the down payment, and the sheer simplicity of the product. Liking the loan is easy enough, but for first-time, low to moderate income borrowers, qualifying for the loan may be harder.