United Wholesale Mortgage has relaunched its 1% down home loan.The announcement comes as housing affordability is still being impacted by high prices and high mortgage rates.It may seem like a great thing for prospective buyers but it is not without its critics.It targets people with low incomes, who otherwise would struggle to qualify for home ownership.It reminds me of the days when home prices were high and inflated in the early 2000s.
The return of conventional 1% down
Home loans backed up by Fannie Mae or Freddie Mac are known as Conforming Loans and require a minimum 3% down payment.The “Conventional 1 Percent Down” loan program is back and requires only a 1% deposit from the borrower.A home worth $200,000 would only require $2,000 of the buyer.UWM would contribute the remaining 2% in this case, or $4,000, to bring the Loan-to-Value (LTV), ratio down to a minimum of 97%.This loan would be a 3% mortgage with 97% LTV and qualify for Fannie Mae/Freddie Mac backing.This would also ease the burden of a downpayment, which is often a major roadblock for first-time homebuyers.The argument will be that this allows buyers to move into their home faster, rather than waiting to save up for a large down payment.Some will say that this type of financing is too accommodating, and those who cannot save up the minimum downpayment should wait to buy a house.The fear of falling house prices could easily push borrowers into negative equity.The current housing boom may seem familiar, but there is a big difference. Today’s borrowers have full underwriting.The borrowers of the past were usually qualified based on their stated income, and they often came to closing with little or no money down.
Who is eligible for a mortgage with a 1% down payment?
- Buyers who earn 50% or less than the median income in their area
- Borrower is required to pay at least 1% down payment
- UWM offers 2% discount on the purchase price, up to a maximum of $4,000
- Minimum FICO score 620 is required
- Follow the guidelines of Freddie Mac Home Possible
- Freddie Mac will back a loan with a 97% LTV.
This new program has income limitations. It’s a program for borrowers whose income is at or below 50% Area Median Income ( AMI).
The offer is also only available to first-time homebuyers (no refinances), and anyone purchasing a property for their own use.
This means that investors and second-home buyers, or speculators are not eligible, but condominiums and other one-unit properties would be.
A minimum FICO score is required because it follows the guidelines for Freddie Mac’s Home Possible.
The only way to get a mortgage is through a broker. UWM does not work with the general public, and therefore, they are a wholesale lender.
The down payment obstacle will be effectively removed, but borrowers will still face much higher monthly housing payments.
The result is a combination of high asking prices and mortgage rate, which have doubled over the past year.
The 30-year fixed rate is priced at around 6.5%. This price was closer to 3% in 2022.
What is the current state of the housing market?
The Fed raised its own Fed Funds Rate in an attempt to curb housing demand. However, lenders increased their affordability options.The housing market may be too competitive due to the ongoing shortage of supply.Take advantage of the “California Dream For All” Home Loan, which allows California home buyers to buy a property with no down payment.This program was sold out within a week because of the unprecedented demand. In this case, the homeowners give up future appreciation in exchange for a mortgage with zero down payment.Other lenders could also emulate this new 1% downpayment option, which could be a return to the industry-wide offering.The housing market could continue to be hot, despite gauges that indicate stress.United Wholesale Mortgage (UWM), based in Pontiac Michigan, became the largest mortgage lender in the United States during the third quarter 2022. This was a victory over Rocket Mortgage , a rival company located across the street.Rocket has yet to be beaten on an annual basis by Rocket, but that may soon happen.UWM is hosting an hiring event this weekend to try and hire 500 new employees in a time where other lenders are closing down their doors.