With loan originations on the decline, it seems that lenders are stepping “out of the box,” so to speak, when it comes to targeting prospective borrowers.
Earlier this week, Guild Mortgage became the latest lender to roll out a 1% down mortgage in an effort to attract first-time homebuyers. Quicken Loans, United Wholesale Mortgage, and Guaranteed Rate also started offering similar loan programs in recent years.
Those loan programs all tackle the down payment requirement, as a recent survey showed that many first-time borrowers still believe they are required to provide a 20% down payment to buy a house.
But what about borrowers that are more concerned with their monthly payment as opposed to their upfront costs?
Stearns Lending claims to have an answer for that.
The lender announced recently that it is rolling out a new program called “Stearns Smart Start,” which features lower monthly payments during the first two years of a borrower’s loan term.
According to Stearns, the loan isn’t an adjustable rate mortgage. Rather, the Smart Start program is a lender-paid buydown of the borrower’s interest rate for the first two years, which decreases the borrower’s monthly payment without any upfront cost.
“In a rising rate environment, consumers often become more interest-rate sensitive,” David Schneider, Stearns Lending CEO, said. “We want to make sure that higher rates do not deter well-qualified individuals and families from reaching their homeownership goals.”
According to Stearns, the program features a 1.5% reduction in the borrower’s interest rate in the first year, followed by a 0.5% reduction in the second year. From there, the borrower will pay the full monthly amount for the remainder of the loan term.
“Temporarily buying down the interest rate and lowering monthly mortgage payments for a two-year period can be a good strategy for many homebuyers, especially those who expect their income to increase in the relatively near future,” Schneider said.
According to details listed on Stearns’ website, when a borrower chooses to participate in the Smart Start program, Stearns sets up an escrow account and deposits funds.
Then, during the temporary buydown period, funds from the account are credited to the monthly mortgage payment to make up the difference between the buydown rate and the loan note rate.
According to Stearns, the program is available on “many of our most popular loan products,” including loans backed by the Federal Housing Administration and conforming loans.
Stearns adds that the buydown program can be combined with other affordable loan products, like Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs, meaning a borrower may only be required to contribute a 3% down payment on the loan.
Stearns adds that the program will also help borrowers build equity in their homes, as even during the lower payment period, funds go toward the loan’s principal and interest.