Bank of America is offering a new loan program that allows borrowers to make a down payment of as low as 3%.
In addition, the new loan program will allow borrowers to bypass private mortgage insurance (PMI) — a safeguard typically required for mortgages that exceed 80% of a home’s value. And since private mortgage insurance can cost borrowers thousands of dollars a year, this news is huge for potential homebuyers who want to save more on their monthly payments.
So how is Bank of America able to make this happen?
Through a special partnership among Bank of America, Freddie Mac and a Durham, N.C., based non-profit called Self-Help Ventures Fund, Bank of America is offering these new loan terms, ideal for first-time home buyers.
‘We need an alternative in the marketplace that helps creditworthy borrowers with a track record of paying debts on time,’ said Bank of America managing director D. Steve Boland.
In order to be eligible for the loan, buyers must have credit score of at least 660, an income that is less than the surrounding area’s median income and there will be restrictions on the amount of the loans offered.
How it works
Bank of America, after writing the loan, will sell it to Self-Help. Then, the loan is sold to Freddie Mac.
If a home buyer defaults on a loan and Self-Help isn’t able to recover the money, Self-Help takes a big portion of the losses before Freddie Mac does. This is how PMI is avoided.
But the goal of offering these loans is that the borrowers won’t default — through financial counseling offered by Self-Help.
Mortgage counseling offered to avoid mortgage defaults
If a homeowner defaults on a mortgage, Self-Help steps in with counseling to help those struggling to pay.
Self-Help CEO Martin Eakes said, ‘We believe the mortgage-lending sector is underserving families of modest means.’ Mr. Eakes also plans to offer similar programs with other large and small lenders.
The idea is that the counseling involved in the process will lower delinquency and foreclosure rates and help to keep people in their homes. Instead of collectors calling you when your mortgage is past due, you’ll be contacted by a financial counselor to help you get back on track. Self-Help will be the intermediary that ensures you live up to your mortgage obligation.
An alternative to FHA loans
This new program is particularly attractive due to the fact there is no PMI required.
Typically, FHA-insured loans have been the kind of loans that people with lower incomes could afford, since down payments could start at 3.5%. But, these loans have typically had PMI attached to them due to the enhanced risk associated when insuring a borrower with an average credit score or a lower income.
But with this new, more favorable option, borrowers could expect to pay less on a monthly basis than they otherwise would with an FHA loan.
For example, a borrower with a $150,000 mortgage, a credit score of 680 to 719 and a 3% down payment would pay $887 a month with an FHA loan. This same borrower would pay about $782 with the Self-Help loan option, according to Bank of America. This is a savings of $1,260 a year.
This means that favorable loan rates and terms could be offered to someone with a less-than-perfect credit score, making homes more affordable for the average person.
Read more: Why you should buy a house below your means