The Credit Union of Colorado has revived a loan product that disappeared following the housing crash a decade ago — the zero-down conventional mortgage.
Reaction to its return will likely range from first-time homebuyers wondering what took so long to survivors of the foreclosure crisis asking why did they awaken a financial beast better left for dead.
“We are looking for a way for individuals to get into the market right away rather than having to save up a down payment while the prices are going up,” said Doug Schneider, vice president of marketing at the credit union, which got its start serving state employees.
Metro Denver home prices were rising 8.6 percent in April from a year earlier. And while that’s below the pace of prior years, only a few areas can beat Denver when it comes to home price appreciation the past five years.
Many first-time buyers, struggling with heavy student loan debt and escalating home prices, have found themselves always one-step behind when it comes to saving enough for a down payment. Now, they must contend with rising interest rates.
The credit union will underwrite mortgages for up to 97 percent on homes valued up to $467,100, with an added cost each month for private mortgage insurance.
The Credit Union of Colorado’s new twist is that it will cover the remaining 3 percent of a home’s cost via an interest-free loan repayable at a future sale or refinancing.
Interest-free, however, doesn’t mean no cost. Borrowers who qualify will pay 0.375 percent more on their 30-year mortgage rate than if they had made the down payment, said Andrew Kotaska, director of mortgage loan services at the credit union.
The going rate the credit union charges on a 30-year mortgage, 4.62 percent, would rise to 5 percent for someone borrowing under the zero-down program.
If interest rates keep rising, as many forecasts predict, then borrowers will likely lock in a lower rate versus waiting another year or two to save up enough for a down payment. If rates stabilize or rise so much that home prices start falling, then waiting would prove the wiser choice.
Lou Barnes, a mortgage industry veteran with Premier Mortgage Group in Boulder, said between the higher interest rate and private mortgage insurance, borrowers could add more than one percentage point to their mortgage rate.
He adds there is a reason why zero-down loans went away, along with a host of other riskier loan products that contributed to the housing crash.
“If you can’t save, what are you doing buying a home with nothing down? … Rolling out stuff like this has marked cycle tops,” he warned. “VA loans have been 100 percent since 1944, but veterans learn special disciplines.”
Veterans can obtain zero-down mortgages and income-qualified borrowers can do so through the Colorado Housing and Finance Authority.
Kotaska said the credit union’s new offering is the first conventional zero-down loan product he knows of available in Colorado, regardless of income or military service.
To qualify, a borrower must have a credit score at 700 or higher and total debt payments that don’t exceed 43 percent of income. Any property must be in Colorado and owner-occupied. Owners must take an online education course and pass a quiz.
“Our underwriting standards are a little more stringent,” he said.
Related Articles
-
Look out Denver homebuyers: Higher interest rates will further strain housing affordability
-
Five houses at five price levels: Here’s what you get in metro Denver for $250,000 to $650,000
-
What are metro Denver’s hottest neighborhoods for home buyers? Think south Denver, north Aurora and Lowry, among others
Kataska and Schneider note that their version of the zero-down loan differs from those issued in the first part of the last decade. They are being made to “prime” rather than subprime borrowers and aren’t being converted into securities and sold to investors.
Credit Union of Colorado will hold loans it makes in its own portfolio. If it miscalculates risk, say because home prices start falling or a recession lifts defaults, the credit union and its members will bear the cost.
“We could easily do $50 million in loans. And we will take responsibility for all of these,” Schneider said.
