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The Federal Housing Administration (FHA) offers home loans that allow low down payments, as low as 3.5 percent; these loans however, need to be backed by private mortgage insurance, meaning an additional cost to already overextended homebuyers. Bank of America is set to launch a new program that will let homebuyers make a down payment of 3 percent, without mortgage insurance. Will this program boost homeownership?
While many banks work with the FHA to provide home loans, Bank of America’s new mortgage product will instead partner with Freddie Mac and Self-Help Ventures Fund, a non-profit organization from Durham, North Carolina. In the program, the bank will sell a mortgage to Self-Help, which in turn will sell it to Freddie Mac. In the occurrence of a default, where Self-Help does not get the entire amount back, it absorbs a large share of the loss before affecting Freddie Mac. This way, the homeowner does not incur extra charges for mortgage insurance.
In 2014, Bank of America paid $800 million to settle “claims of making errors on FHA-backed loans.” Other banks have also made similar payments and are now backing out of a coalition with the FHA, making it more difficult for low-income borrowers to obtain loans.
In 2007, 74 percent of all mortgages were from banks but this number dropped to 52 percent by 2014. For the last quarter of 2015, Wells Fargo, a major player in the mortgage business, made only $47 billion in mortgages compared to $125 billion for the last quarter of 2012. In a scenario where big banks are seen retracting from the mortgage market, this new program from Bank of America may be a blessing for potential homebuyers.
To qualify for this program, borrowers must have a minimum credit score of 660 and an income lower than the median income of their region. According to Bank of America, a person with a credit score ranging between 680 and 719, borrowing $150,000 and paying a three percent down payment will pay monthly dues of $782 for their loan versus $887 for an FHA-backed loan from the same bank. As part of the program, borrowers with financial troubles will also be offered expert advice on avoiding foreclosures.
This loan program could offer crucial support to a housing economy that is gradually improving, as home sales have inched upwards in January 2016. Low inventory leading to even lower affordability have hindered potential homebuyers but with new construction picking up and attractive loan programs like Bank of America’s, these buyers may soon become owners.