Some buyers turning to 1% down mortgages, but are they worth it?
MINNEAPOLIS -- The current housing crisis is based largely on cost.
"We've got a real affordability crisis now, especially for first-time homebuyers. It's just difficult for buyers to qualify for a mortgage now, to come up with a down payment," Jeff Ostrowski, an analyst with Bankrate, said.
Ostrowski says that, plus the mortgage market's downturn over the last year and a half, is causing big lenders to take action. So-called 1% down mortgages are an attempt to spark business off the current programs from Fannie Mae and Freddie Mac.
"If you qualify for this program with a 3% down payment, we'll come up with the other 2% or so on your behalf, so you only have to come up with 1%," Ostrowski said.
Under Rocket Mortgage's program, a homebuyer purchasing a home worth $250,000 would put down $2,500 instead of the minimum 3%, or $7,500. The company says it also offers mortgage insurance at no cost to the client, saving them a few hundred dollars a month, and freeing up cash flow.
The maximum loan amount allowed is $350,000.
United Wholesale Mortgage's program allows higher purchase prices, but the credit quickly maxes out at $4,000.
"Here in Minnesota, it would be a $200,000 purchase price or less where you're only going to put 1% down. If you go higher than that you're going to have to come up with more of your own money," Brady Day, mortgage consultant and owner of First Class Mortgage in Maple Grove, said.
The average first-time homebuyer puts from 5% to 7% down, according to the National Association of Realtors. In the first quarter of 2023, that amounted to $24,000.
Day says local homebuyers who can't afford a down payment that large are asking about the 1% option, among other things.
"They're looking at getting gifts from their parents, they might be looking at taking a loan out from their 401K, or maybe they're putting off purchasing for a few months so they can save up those funds -- $4,000 just gets them that much closer," said Day.
But not everyone qualifies. You must have a credit score of 620 or higher. And you can't make more than 80% of the median income in the area where you're buying.
"In Hennepin County, it's around $94,000. So that takes into consideration all the borrowers on the application, so that's going to be a limiting factor," said Day.
Another concern borrowers should consider is owing more than their homes are worth.
That said, Day believes a 1% down mortgage is worth examining among all the other creative lending options.
"It is going to be a popular program because it is $4,000, but we're going to compare that and contrast it with other programs that they have to put a little more money down, might allow them to get a better interest rate or lower mortgage insurance to be able to do those other programs," said Day.