The government is cracking down on affordable housing programs that help buyers with their down payments. There’s concern that zero-down government-insured home loans are a risk to the nation’s $1.3 trillion mortgage insurance fund, so HUD issued a clarification letter on the rules for FHA loans. The risk is based on a growing number of FHA loans, and historical data that shows those borrowers are twice as likely to default.
The FHA typically requires 3.5% down. That’s a low number but many potential homebuyers can’t afford that amount. Bloomberg reports that four out of 10 FHA borrowers need assistance with their down payments, and new guidelines from HUD are focused on this subset of borrowers. (1)
Down-Payment Assistance Programs
The new guidelines apply to any lender or entity that provides all or part of that 3.5% down payment to help the buyer. According to the rules, this assistance cannot come from the seller. It cannot come from any other person or entity that would benefit financially from the sale, including both direct and indirect benefits. And, it cannot come from anyone who will be compensated in some way, both directly or indirectly.
The rules do allow some family members to contribute to a borrower’s minimum required investment or MRI. There are also special rules for government-sponsored homeownership programs. One specifies that these programs must apply only to buyers within their districts. That’s apparently causing some confusion for organizations that operate nationally.
Zero-down loans are generally not available for owner-occupied homes. Congress abolished them after the 2008 housing meltdown because they ended up costing the FHA insurance fund a bundle. During the housing crisis, the FHA insurance fund ended up covering about $17 billion dollars in bad mortgages.
100% Investment Loans
There is a new loan product for investors. A New York lender is offering a new zero-down loan for fix-and-flippers. It’s a hard money loan from Hard Money Sources. Investors must have good credit and income verification to qualify. This could help investors who want to capitalize on a deal quickly, but have all their cash tied up in other investments.
A hard money loan is any loan that’s tied to an asset, like real estate. It is often used by developers who need a short-term loan for a rehab project, and is based on the value of the property, both before and after the repairs. Hard money lenders are private lenders and are usually more flexible than bank lenders. That also makes these loans more risky, and more expensive, but they are also designed as short-term loans.
Hard Money Sources offers several kinds of real estate loan products including fix-and-flip and construction loans. It said in a press release that the 100% zero down investment loans are geared for fix-and-flippers with good credit and need a second loan for the down payment. Down payments are often around 10% for investment projects. (2)
This company is offering the zero-down option as a two-loan combination. The first is a traditional hard money loan that’s tied to the asset being financed. The second is a personal loan for the down payment based on the individual’s creditworthiness. The company offers combination loans from $100,000 to $1 million at 90% loan-to-value for the primary loan, and percentage rates that begin around 5%, according to the website.
To qualify for the zero-down payment option, the borrower must have a FICO score of at least 680. He or she must also be employed or have income from some other source. The down-payment portion of this loan is not available in Nevada.
The company says, “While most fix & flip rehabs are made by individuals that use their own capital, many individuals have expanded their rehab operations and need additional sources of capital.” It also says, most loans are funded quickly, within about a week instead of the typical 30 to 45 days for a bank loan. The application process is only supposed to take a day or two.
Banks Tighten Lending Standards
This new loan offering comes at a time when traditional bank lenders are tightening their standards for commercial real loans, as well as credit cards. In a new survey, senior loan officers expressed concern about the economy, despite the strength we are seeing for the job market and the U.S. economy. Among their concerns are potential losses from loans that are vulnerable to the volatility in Europe and Asia. (3)
Standards for residential real estate, car loans, and business loans have not changed much, according to the survey.
(1) FHA Standards: Bloomberg
(2) Hard Money Loans