With the housing crisis and the recession firmly in the rear-view mirror, more and more credit unions are looking for ways to help consumers qualify for home loans — even if that means accepting a significantly lower down payment than might ordinarily be required.
One example is Orange County’s Credit Union, a $1.5 billion institution based in Santa Ana, Calif., which has unveiled two new products designed to help consumers purchase a new home in a very tough housing market.
The products — a conventional loan with zero down payment and a loan with 3 percent down — allow borrowers to qualify for a home for basically little or no down payment. OCCU representatives said one of the major barriers to home buying, especially for younger people, are the large down payments many lenders typically require.
“Saving for a large down payment is often what keeps would-be homeowners from realizing their dream of homeownership,” said Carlos Miramontez, vice president of mortgage lending at OCCU. “Prior to offering these home loan solutions we encountered members that had good credit and employment, and were paying high and rising housing rents, who were seeking to own a home. The only thing keeping them from owning a home was they did not have tens of thousands of dollars in their bank account for a 5 percent or greater down payment.”
For example, Miramontez cited, for a home valued at $500,000 (which is slightly lower than the median home price in Southern California) a consumer would need a minimum of $25,000 (5 percent) for a down payment — and this figure does not even include the funds required for closing costs and escrow/impounds.
“While members wait to save for these large down payments, the price of homes continues to rise,” said Miramontez. “We refer to this as the ‘cost of waiting. At some point, the members experience the risk of home prices reaching levels they could no longer afford as they save for the down payment and this results in them remaining renters [despite] their best efforts to own a home.”
The zero-down and 3 percent down home loans help eliminate this barrier, he added. Moreover, the 3 percent down mortgage can be used for a loan amount up to $850,000.
To qualify for these loans, Miramontez explained, members must demonstrate a “strong credit character” and “stable employment.” The credit union looks for a minimum FICO score of 720 for the zero-down option and a 680 score for the 3 percent down option.
“The zero down payment requires some housing payment reserves while the 3 percent down payment mortgage does not,” he said. “Both home loans require private mortgage insurance — this helps mitigate the collateral risk for the credit union associated with these low down payment mortgage loans.”
Miramontez noted that although many members initially inquire about the zero down payment home loan, OCCU’s mortgage loan consultants compile an individual financial analysis for each member which helps them identify the right home loan solution that meet this specific needs.
“This could be the zero-down mortgage they initially inquired about or a home loan with a larger down payment,” he said. “Our goal is not to originate a particular type of home loan but rather to provide the ideal home loan for our members that meets their financial needs.”
The success of this program will, of course, ultimately be measured by the number of homes sold to first or second-time buyers.
While a handful of other credit unions offer zero down payment mortgages, this product is not ”widely available” in the industry, Miramontez cautioned.
“Even if it were available at all credit unions, our industry only accounts for approximately 10 to 11 percent of the mortgage origination market combined,” Miramontez elaborated. “This shows that a zero down payment mortgage is not a product the average consumer has access to.”
For example, a mortgage loan from the Veterans Benefits Administration is a zero-down product but is not available to the average consumer.
Tim Mislansky, SVP and chief lending officer at Wright-Patt Credit Union, a $3.8 billion institution based in Beavercreek, Ohio, said he is familiar with some credit unions and other lenders offering no money down loans. He noted, however, that over the past year, a few lenders have ventured back into this area.
“Accumulating a down payment continues to be one of the biggest barriers to home ownership,” said Mislansky, who is also president of the myCUmortgage CUSO. “When structured and underwritten well, a no-down payment first mortgage can help more members with home ownership. It’s especially important to couple the mortgage product with solid education about what to expect as a homeowner and how it impacts your overall finances. I applaud this credit union for seeking a risk-balanced approach to helping more members with home ownership.”
According to the California Association of Realtors, the median price of a single-family home in Orange County, as of August 2017, was $789,000. “This makes Orange County the highest cost housing market in all of Southern California,” Miramontez indicated. “The year-over-year home appreciation rate for the County is 5.3 percent. This … adds further strain to would-be home buyers.” Also, the housing affordability index for Orange County, according to CAR, has dropped down to just 21 percent, the lowest in all of Southern California.
Navy targets PMI
On the other side of the country, the biggest credit union of them all, the $82 billion Navy Federal Credit Union of Vienna, Va., has offered a similar product at Orange County’s Credit Union.
Kevin Parker, assistant vice president of field mortgage at Navy FCU, noted that VA loans have provided veterans and active duty members with a "zero-down" mortgage option for many years. Navy Federal itself has also offered a “HomeBuyer's Choice” mortgage product with zero down and has even offered “jumbo mortgages” with a zero-down option for at least a decade.
“We wanted to eliminate the requirement for our members to pay private mortgage insurance (PMI), so Navy Federal members can focus on what's most important to them, and that's affording a house or condo they want to call home for many years," Parker added.
Parker further said that the “no money down” mortgages Navy offers are “very popular” with its members, as well as with Realtors and builders. He estimates that VA loans make up approximately 50 percent of Navy FCU’s total purchase application/pipeline.
“When we consult with a member about the different mortgage options, we like to point out that using a zero down product allows you to keep your cash on hand for repairs, home improvements or unforeseen expenses,” he explained. “Giving members financial flexibility is good for them and it's good for us as a credit union."
Applicants for these mortgages are not required to have perfect credit for these products, Parker said.
“Navy Federal takes a lot of financial factors into account when reviewing a mortgage application and we have products available to make sure members have an opportunity to get a great deal on their mortgage," he concluded.