- - Thursday, August 4, 2011

The idea of a home loan with no down-payment requirement causes consternation among some people, many of whom view that type of home financing as part of the bad lending practices that ended in a housing crisis and widespread foreclosures.

Yet low-down-payment and no-down-payment loans have been available for a long time through the Veterans Affairs (VA) loan program and the Department of Agriculture’s Rural Development programs. Down-payment assistance has been available continuously from government programs that enable borrowers to buy homes with almost no cash needed. Individual lenders also offer low- or no-down-payment programs to qualified buyers, who must meet strict guidelines for creditworthiness and the ability to repay the loan.

Frank Donnelly, vice president of the Mortgage Bankers Association of Metropolitan Washington, says low- or no-down-payment loans are different and safer than they were a few years ago.

“When no-down-payment loans were being offered in the past, they often included other layers of risk, such as no income verification requirements,” Mr. Donnelly said. “In addition, the loans themselves were riskier, such as interest-only loans or adjustable-rate mortgages that would have increased payments at some point.

“Lenders were qualifying borrowers for these loans on multiple homes, too, rather than limiting them to just the borrowers’ primary residence. Lenders have now tightened their guidelines on every one of those other factors and just loosened one thing, the down-payment requirement.”

Borrowers today need to be more creditworthy than at any time in the past decade, especially when they are applying for 100 percent financing, said Doug Benner, a senior loan officer with Embrace Home Loans in Rockville.

“Everything is looked at again and again to make sure someone can afford the loan,” Mr. Benner said. “Low-down-payment loans often have more conservative requirements for the credit score and the debt-to-income ratios than FHA loans. They are designed for people who have the finances to buy a home but lack assets.”

Barbara Sheehan, assistant vice president for mortgage products for the Navy Federal Credit Union in Vienna, said 100 percent financing has been available since World War II for veterans through VA loans. Navy Federal Credit Union offers its HomeBuyers Choice Mortgage program, which is similar to a VA loan program for those who are not eligible because of the lack of military service.

“We’ve done VA loans successfully for decades,” Ms. Sheehan said. “These loans just need good underwriting and good documentation to work. We do it the proper way, without any false information or stated income. Everything must be verified.”

BB&T offers the Community Homeownership Incentive Program (CHIP) as a no-down-payment and no-mortgage-insurance alternative to FHA-insured loans, which require 3.5 percent of the home value as a down payment and also require mortgage insurance.

“We’ve been offering the CHIP program for more than 10 years because we are aware that one of the largest barriers to homeownership is the down-payment requirement,” said Patty Widerman, senior vice president and group mortgage manager for BB&T Mortgage.

“When you compare this loan to an FHA loan, not only do we eliminate the down payment for some borrowers, but we eliminate mortgage insurance,” she said. “We self-insure this loan, so borrowers can save a lot of money by not paying the upfront or the monthly mortgage insurance that FHA requires. We calculated that on a $200,000 loan, borrowers would save $184 per month because we don’t charge mortgage insurance.”

BB&T’s program is limited to loans of $417,000, and the loans are always 30-year fixed-rate loans. Borrowers must have $500 of their own funds in the transaction. The borrowers do not have to be first-time homebuyers, but they cannot own another property when the loan is being underwritten.

The income limitations for the Washington, D.C., area allow 100 percent financing for households with an income of $84,880, which is 80 percent of the median income for this area as determined by the Department of Housing and Urban Development. Borrowers with an income up to a maximum of $106,400 can borrow up to 97 percent of the value of the home. Properties located in a “targeted census tract,” an area that is considered underserved for mortgage loans, have no income limitations.

To qualify for a CHIP loan, borrowers must have verifiable income and cash reserves to cover principal, interest, taxes and insurance payments for at least two months. While no minimum credit score has been established for 97 percent loan-to-value loans, borrowers are expected to have good credit and will have their credit history reviewed. Loans with 100 percent financing require a minimum credit score of 660. Debt-to-income ratios are strictly enforced at a maximum of 41 percent of gross monthly income for all debt payments. All applicants must complete a homebuyer education program.

“Our mortgages are manually underwritten, so we look at the repayment performance history very carefully for all borrowers,” Ms. Widerman said.

SunTrust Bank offers a program similar to the CHIP loan that also is limited to loans up to $417,000.

“Borrowers can only use these loans on their primary residence and cannot own another property while buying a home with this loan,” Mr. Donnelly said. “These are portfolio loans, so we do manual underwriting, which allows us to make case-by-case decisions and to use compensating factors such as extra cash reserves that can overcome a lower credit score. We do expect good credit, generally at least above 620 or higher. … We are not flexible at all on the debt-to-income ratios because we want to make sure the mortgage is affordable to the borrowers.”

The SunTrust loan program has similar income restrictions to the CHIP loan and does not have any income limitations for properties located in low- to moderate-income census tracts. All borrowers must fully document their income and assets, and if the property is older than 15 years, a home inspection is required.

The Navy Federal HomeBuyers Choice program does not charge mortgage insurance but does require a funding fee of 1.75 percent of the loan amount. The funding fee cannot be financed into the mortgage. Borrowers also need cash for closing costs unless the seller has agreed to pay those costs.

“To qualify, borrowers need to have good credit, such as B-plus or A credit, generally from the low- to mid-700s and above,” Ms. Sheehan said. “They need stable employment of at least two years that can be documented, full documentation of income and a two-year credit history.”

Navy Federal also requires cash reserves to cover six months of principal, interest, taxes and insurance payments. Typically, the maximum debt-to-income ratio requirement is 41 percent, but sometimes borrowers with excellent credit can go up to 45 percent and still qualify.

“Generally speaking, if credit is not your issue, the HomeBuyers program will be a better loan because of the lack of mortgage insurance,” Ms. Sheehan said. “But if you have credit problems, you may need to go with an FHA loan.”

Mr. Benner said that because not every lender offers every program, borrowers who need down-payment assistance may need to talk with several lenders to learn about all their available options.

“There are state and county and city-specific programs in Maryland, Virginia and D.C. that can offer down-payment and closing-cost assistance, usually with some income restrictions,” Mr. Benner said.

“In many cases, the borrowers need to pay something out of pocket, such as 1.75 percent of the home price or at least $500. Buyers can search on the Internet for local housing programs to see if they qualify and consult three or more different lenders to compare their options.”