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LoanDepot is now offering second mortgages to help would-be homebuyers who can’t come up with the 3.5 percent minimum down payment required to qualify for FHA purchase mortgages.
The “accessZERO” program announced Tuesday provides a down payment of up to 5 percent, in the form of a 10-year fully amortized second mortgage.
Jeff Walsh
“As we continue to unlock new ways for our customers to purchase homes in today’s challenging market, accessZERO helps address a significant barrier, particularly for first-time buyers grappling with the obstacle of saving for the higher-down payments that come with the rising costs of housing,” said LDI Mortgage President Jeff Walsh in a statement.
The new loanDepot program is available everywhere except New York, to qualified buyers purchasing a primary residence using the standard 203(b) FHA purchase loan.
With high home prices and mortgage rates creating affordability challenges for borrowers, a number of lenders have launched solutions to help homebuyers who have little savings for a down payment.
Down Payment Resource, an Atlanta-based technology provider, tracks assistance programs available through federal, state, county or local government agencies that can be accessed through integrations with multiple listing services (MLSs), lenders and agents. Freddie Mac launched a similar tool for lenders this month, DPA One, that lets lenders enter client eligibility parameters and receive information about down payment assistance programs.
Some lenders are helping low- and moderate-income borrowers buy houses with as little as 1 percent down using conventional loans, meeting requirements set by Fannie Mae and Freddie Mac.
Fannie Mae’s HomeReady mortgage and Freddie Mac’s Home Possible loans let borrowers put down as little as 3 percent, with private mortgage insurance (PMI) required on loans with down payments of less than 20 percent.
Lenders like Rocket Mortgage, United Wholesale Mortgage and Zillow are providing grants so that buyers only need to come up with a 1 percent down payment to take out a HomeReady or Home Possible loan. Rocket sweetens the deal by also picking up the cost of PMI.
During the housing boom leading up to the Great Recession of 2007-09, second mortgages were a popular way to help homebuyers avoid paying for PMI when taking out conforming mortgages eligible for purchase by Fannie and Freddie.
But second mortgages fell out of favor during the housing bust, since it became almost impossible for lenders to securitize them and sell them to investors. Second mortgages can complicate loan modifications for distressed borrowers. And if a home with two mortgages goes into foreclosure, the lender or investor who holds the second loan typically doesn’t recover their losses until after the holder of the first mortgage is repaid.
Closed-end second loans, which have fixed repayment terms, have made a comeback as a way for homeowners to cash out home equity. Policy analysts at the Urban Institute also see second mortgages as a potential mechanism for allowing homebuyers to assume a seller’s FHA loan.
“Closed-end seconds were largely banished after the financial crisis. But bringing them back responsibly with proper underwriting can safely allow borrowers with low credit scores to extract equity from their home when cash-out refinancing is not economically feasible,” Urban Institute analysts wrote in January. “By developing the second-lien market, originators can also allow prospective homebuyers to assume Federal Housing Administration mortgages and obtain the benefit of a lower rate on part of their mortgage.”
Another option for borrowers scraping together a down payment are Special Purpose Credit Programs (SPCPs) offered by a growing number of lenders to borrowers in underserved areas who might otherwise be denied credit or offered less favorable terms.
Lenders that offer mortgages through SPCPs include:
- AnnieMac Home Mortgage
- Bank of America
- Chase
- CrossCountry Mortgage
- Guaranteed Rate
- Movement Mortgage
- Rocket Mortgage
- TD Bank
- U.S. Bank
- United Wholesale Mortgage
- Wells Fargo
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