1% down mortgage possible?

1% down mortgage possible?

The Rise of 1% Down Mortgages: Making Homeownership More Accessible

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Down payments have always been the biggest hurdle for cash-strapped renters looking to enter the world of homeownership. However, as home prices continue to rise, mortgage lenders have had to get creative and develop innovative ways to widen their pool of prospective borrowers. One of the latest trends in the affordable mortgage wave is the 1% down mortgage.

What is a 1% Down Mortgage?

Typically, the lowest down payment a borrower can make on a conventional mortgage is 3%. While some government-backed mortgages allow for no down payment, these loans are only available to borrowers who meet specific eligibility criteria. With the 1% down mortgage, the borrower is only required to bring 1% of the purchase price in cash to the transaction. However, the lender provides a 2% grant to achieve a 3% total down payment.

These 1% down programs can be a game changer, especially considering the significant increase in home prices in recent years. Traditionally, to buy a $250,000 home, a borrower would need at least $7,500 to make the minimum down payment of 3%. However, with a 1% down mortgage, they’d only need $2,500 of their own funds. The lender would provide the remaining $5,000 in the form of a grant, in addition to a $242,500 loan to cover the rest of the purchase.

Lenders That Offer 1% Down Mortgages

Currently, the major players in the 1% down mortgage market are Rocket Mortgage and United Wholesale Mortgage. These lenders are respectively the No. 1 and No. 2 largest mortgage lenders in the US, according to Home Mortgage Disclosure Act data. Zillow Home Loans has also recently joined the trend with its own 1% down program, although it is more limited in scope.

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• Rocket Mortgage 1% Down Payment Program: Known as ONE+, this mortgage program is available to borrowers who make 80% or less of the area median income, with a minimum required credit score of 620. The ONE+ mortgage not only allows a minimum down payment of just 1% but also eliminates the need for private mortgage insurance (PMI), which is generally required on conforming loans with down payments below 20%. By avoiding PMI, ONE+ borrowers can lower their monthly payment. Additionally, Rocket Mortgage allows borrowers to make a larger down payment and still receive the 2% grant, with a combined down payment of up to 5%.

• United Wholesale Mortgage 1% Down Payment Program: Referred to as the Conventional 1% Down mortgage, this program has similar income and credit score requirements as Rocket Mortgage. However, it does require PMI and limits the grant provided by UWM to a maximum of $4,000. Depending on the home price, borrowers may need to bring more than 1% to the table to achieve a total down payment of 3% with UWM’s grant. UWM operates as a wholesale mortgage lender, meaning borrowers can only access its mortgages through a mortgage broker.

• Zillow Home Loans 1% Down Payment Program: Zillow’s 1% Down Payment program is currently only available in Arizona, although the lender plans to expand it. Similar to Rocket’s and UWM’s programs, Zillow’s program allows borrowers to put 1% down and provides an additional 2% down payment, for a total of 3% down. However, Zillow does not provide additional details about income limits or whether PMI is required.

Pros and Cons of a 1% Down Mortgage

Pros

• Spend less to get into a home: A 1% down mortgage reduces the upfront cost of becoming a homeowner by thousands of dollars.

• Lender-provided grant gives you additional equity: The grant provided by the lender essentially adds to the borrower’s equity, promoting greater financial stability.

• Use your savings toward other financial goals: By requiring a smaller down payment, borrowers have the opportunity to use their savings for other important expenses, such as new furniture or building an emergency fund.

Cons

• Larger monthly payment: While 1% down mortgages may make homeownership more accessible, the reduced down payment typically leads to a higher monthly mortgage payment.

• Potential for being underwater: Starting out with only 3% equity in a home can be risky. A drop in home values could result in owing more on the mortgage than what the home is worth, potentially putting borrowers in a financially precarious situation.

• Refinancing challenges: Having limited equity in the home may make it difficult to refinance, preventing borrowers from taking advantage of lower interest rates.

Other Low Down Payment Options

If borrowers do not qualify for a 1% down mortgage or find it unsuitable for their needs, there are several other low or no down payment options available:

• FHA Loans: Backed by the Federal Housing Administration, these mortgages require a down payment of just 3.5% and have less stringent credit requirements, including a minimum credit score of 580.

• VA Loans: Available to current servicemembers and veterans who meet minimum service requirements, VA loans require no down payment and no mortgage insurance. They are backed by the Department of Veterans Affairs.

• USDA Loans: Guaranteed by the Department of Agriculture, USDA loans enable low-to-middle income borrowers in eligible rural or suburban areas to buy a home with no money down.

Additionally, many individual lenders offer unique mortgage programs that provide low down payments along with other perks, such as closing cost grants or flexible credit requirements. Chase Mortgage, for instance, offers the DreaMaker mortgage, allowing for 3% down payments with PMI at a reduced cost. This mortgage can be combined with Chase’s Homebuyer Grant, which offers up to $5,000 in down payment and closing cost assistance.

Whether borrowers opt for a 1% down mortgage or explore other low down payment options, it is essential to carefully consider their financial situation, future plans, and the potential risks associated with these mortgages. With the right choice, individuals can achieve their dream of homeownership and enjoy the benefits it brings.