Zero down payment mortgage and similar programs seem to have recently gained traction on Main Street.
Bank of America announced Aug. 30 that it is launching a trial program, called the Community Affordable Loan Solution, that offers mortgages that don’t require closing costs, down payments or minimum credit scores. People in predominantly Hispanic or black neighborhoods in Charlotte, North Carolina; Dallas; Detroit; Los Angeles; and Miami that meet specific income requirements will be eligible for the program.
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As mortgage interest rates rise, the demand for loans and refinancing falls
In March, TD Bank launched a similar program that includes a $5,000 lender credit that qualified borrowers can use toward closing costs on home purchases or down payments. Qualified borrowers must meet certain credit and income parameters, as well as reside in a participating market, according to the bank’s press release.
JPMorgan Chase also expanded its grant program in February 2021 to offer $5,000 in closing costs and down payments to homebuyers purchasing homes in predominantly minority neighborhoods.
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The latest data from the National Association of Realtors found that there was a significant racial disparity in homeownership in 2020. White households had a homeownership rate of about 72.5%, while the homeownership rates for Hispanic and black households were 51.1% and 43, respectively. 4%. .
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However, zero down payment loans have some drawbacks, according to Bankrate.com financial analyst Greg McBride.
“The downsides are that homebuyers are very dependent on further price appreciation to build a meaningful equity stake, and without that there won’t be enough equity to pay the closing costs if plans change and they have to sell in the first few years.” he told FOX Business.
He also told FOX Business that this is the “wrong end of the real estate cycle for no down payment mortgages.”
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“The risk to borrowers has grown because of the increase in home prices,” McBride said. “If home prices stagnate, or even fall, a no-down loan can set the buyer up for failure, as they won’t have much, if any, equity in the home.”
That increases the likelihood of defaulting on a loan if the borrower wants to leave the home, he said.
The housing market has cooled in recent months. The number of home sale cancellations hit a two-year high in July, when about 16% of homes that went under contract that month were canceled, according to a Redfin analysis. Sentiment among builders also reached a record low since May 2020.
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