Will Non-FHA Low Down Payment Programs Make a Splash?

With the announcements from Bank of America, Wells Fargo, JPMorgan Chase, and Quicken Loans for non-Federal Housing Administration low down payment programs, questions and thoughts have risen about the programs themselves and what their effect on the mortgage industry may be. For some first-time buyers and low- to moderate-income (LMI) buyers, these programs may be beneficial while for others it may not be a viable substitute for FHA lending.

From what is known about the individual programs from these four home lenders, potential first-time buyers and LMI buyers receive quite a few borrower-friendly features. For the Bank of America payment program, Affordable Loan Solution, buyers gain the ability to combine down payments with gifts and grants, homebuyer counseling, consideration of nontraditional forms of credit, and no private mortgage insurance (PMI). For Wells Fargo’s payment program, yourFirstMortgage, buyers are offered loan options that can work with or without PMI. Quicken Loans’ payment program, Home Possible, offers borrowers a 2 percent grant and sells the loan to Freddie Mac and requires PMI. Finally, for JPMorgan Chase’s program, Standard Agency 97 percent, loans will be sold to Fannie Mae and it is not yet known publicly if PMI alternatives are available.

According to Karan Kaul of the Urban Institute, first-time homebuyers and LMI buyers are heavily relying on FHA lending presently, but many home lenders have recently started to pull back from FHA lending, possibly due to the heightened risk of enforcement. Kaul says that he believes these new programs that don’t rely on FHA are creative attempts to increase lending to LMI borrowers. He doesn’t believe, though, that they will become meaningful substitutes for FHA with the way things are currently.

Kaul breaks his reasoning down into two parts, the first being an acute shortage of nonprofit capital to support lending volumes nationally.  He states that, “Nonprofit capital is often sourced via loans or grants from foundations, community development organizations, or the government. Limited funding from these sources means the potential mortgage origination volume through such initiatives is also limited.” The second reason Kaul states is FHA’s huge price advantage over conventional lending across the credit spectrum.

None of this means, though, that these programs won’t be beneficial. Many first-time home borrowers and LMI borrowers could benefit from these programs, according to Kaul, due to the recent cut in PMI premiums. That being said, higher creditworthy borrowers are most likely to benefit from it than those with lower credit scores. Additionally, low down payment lending outside of FHA is still in its early stages meaning improvements will be developed. According to Kaul, “FHA’s current price advantage is simply a reminder that such improvements will be needed if we are to lend tight credit a sustained meaningful blow.”

Click here to view Kaul's blogpost for the Urban Institute.