While megabanks like Bank of America, Wells Fargo, and JPMorgan Chase grabbed the headlines earlier this year by separately announcing plans to offer mortgages that only require a 3% down payment from the borrower, there is another major lender that is quietly requiring even less from borrowers.
Unbeknownst to many in the market, Quicken Loans began offering an even better deal for borrowers late last year – a 1% down mortgage.
But, here, the company opens up for the first time about the product.
First, Quicken’s 1% down mortgage program isn’t for everyone, as there are several stipulations and requirements, but a 1% down payment is still a 1% down payment.
So why did Quicken Loans decide to break the mold?
After being tipped off to Quicken’s 1% down program by mortgage industry insider Rob Chrisman, who noted Quicken’s program earlier this week, HousingWire contacted Quicken to answer that exact question.
Now, in an exclusive interview, Bill Banfield, Quicken Loans’ vice president of capital markets, provides more details on how this program came about, how it works, and why it’s so important for Quicken.
According to Banfield, the 1% down loan program isn’t quite as shocking as it appears.
The program is actually part of a partnership between Quicken and Freddie Mac that was announced in October 2015.
At the time, the details on the partnership were sparse, with the two organizations stating that the program will feature “unique, co-developed products to meet the needs of emerging markets, including Millennials, first-time homebuyers and middle-class borrowers.”
As it turns out, one of those loan options is a 1% down loan, but as Banfield notes, the loan is actually structured to be part of Freddie Mac’s Home Possible Advantage program, which the government-sponsored enterprise launched in December 2014, and requires a 3% down payment.
So how does Quicken Loans get from 1% down from the buyer to the 3% necessary to take part in Freddie Mac’s program? Quicken grants the extra money to the borrower, Banfield said.
“We require 1% from consumer and we give the consumer a 2% grant, so the client has 3% equity immediately,” Banfield told HousingWire.
But the 1% down program isn’t offered to everyone, Banfield said. There are several rules as to who is eligible.
First, Quicken’s 1% down loans are only available for purchase mortgages. No refinances are permitted. Second, the program can only be used on a single-family home or condo, not a second home, investment property or co-op.
Additionally, borrowers must have a FICO score of 680 or above, must earn less than the median income for their county, and must carry a debt-to-income ratio of 45% or less.
Also, as part of the program, Quicken Loans makes a free online course on homeownership available to all eligible borrowers. First-time buyers are required to take the online course to be eligible for the program.
So why does this program make sense for a borrower, other than the low down payment, of course?
According to Banfield, the terms of this loan are advantageous over a loan backed by the Federal Housing Administration, for example.
“The truth of FHA is that its max loan-to-value ratio is 96.5%,” Banfield explains. “But most buyers roll in their upfront mortgage insurance premium of 1.75%, leaving them with 98.25% LTV.”
So with Fannie and Freddie offering borrowers the opportunity to put down only 3%, with no upfront mortgage insurance premium and no life-of-loan mortgage insurance premium like with the FHA, borrowers have more equity up front and more equity when they’re done with MI, Banfield said.
Given those stipulations, “You would not consider that a subprime loan,” Banfield said, when asked about the potential negative feedback to this program. “The market has changed so much since the crisis. Rules are so much different now. You really can’t roll out a program like this without thinking it through completely.”
So why offer loans to consumers that are only fronting 1% of their home’s purchase price?
For Quicken, it’s all about trying to help more consumers get into a home, while ensuring that it’s being done intelligently and safely.
“We want to try to help people and do it in a smart way,” Banfield said. “For us, it was really a question of if you want to provide access to credit, how do you do it responsibly? How can you help people? If first-time buyers are struggling, are there smart ways to help them while still balancing access to credit?”
And Quicken saw that opportunity in the 3% down loan programs offered by Freddie Mac and Fannie Mae, which also launched a 3% down loan program in December 2014.
According to Banfield, Quicken began offering both programs but saw a limited response.
“We offered Fannie and Freddie 97% LTV loans since they reinvigorated them. But we saw anemic growth in those programs,” Banfield said.
“The question became, if you offer programs with 3%, why aren’t people taking advantage of that? Well, people are going to seek what is the best for them,” Banfield “And those programs were initially way too detailed on trying to find the right thing for the right buyer.”
But in the time since Fannie and Freddie announced those programs, Banfield noted that both GSEs have changed some of the stipulations to enable more borrowers to take advantage of the low down payment program.
“The stories that you hear are how to get more people at entry-level buyers, whether they are first-time buyers or Millennials, into a home,” Banfield said. “There are a lot of hurdles out there. Some people like to avoid FHA for whatever reason. And we wanted to have a conventional option to get people into more homes.”
So Quicken worked with Freddie Mac to pilot this program to offer its customers another reasonable loan option.
“Currently, this is one of our options for our customers. It’s really going to be client specific,” Banfield said. “We want to take care of our clients and help them as much as possible. So if this is the best option for them, then let’s do it. If it isn’t, if an FHA loan or (a loan backed by the Department of Veterans Affairs) is a better option, then we’ll do that instead.”
Banfield said that the company has seen a good response from the 1% down program since its inception and expects the program to grow in the future.
“We started offering this program six or seven months ago, and I think it’s worked out really well so far,” Banfield said. “This program is consistently grown and we think it’s going to continue to grow.”