Ideal Credit Union, which has six locations scattered across Minnesota, is the latest mortgage company to offer a no down payment mortgage. But theirs is a little different than the rest.
Instead of pitching the portfolio loan product to those who can barely afford a mortgage payment, they seem to be targeting prospective home buyers who make plenty but don’t necessarily have the assets to show for it (yet).
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Skip the Down Payment
Their pitch for the new zero down mortgage product is “skip the down payment,” which I’m sure a lot renters would be thrilled to do if they could.
But before you skip anything, you have to make sure you qualify for the mortgage. And you’re not getting a 30-year fixed mortgage via this program. That would be way too easy, apparently.
Instead, you can choose from either a 20-year or 15-year fixed mortgage, both of which are usually suited for borrowers with more-than-adequate incomes. I say that because many borrowers struggle with maximum debt-to-income ratios even when applying for 30-year fixed mortgages.
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After all, the monthly mortgage payment will be about 50% higher for a 15-year fixed and roughly 25% higher for a 20-year fixed mortgage versus a 30-year loan.
The upside is lower mortgage rates on both products relative to the 30-year fixed.
Targeting the Well-Paid, Cash Poor
To that end, they seem to be targeting high-paid loan applicants, perhaps younger first-time home buyers just starting out, who tend to have very little set aside for a down payment.
The same type of borrower who probably has very little chance of putting down 20% without relying on gift funds.
Anyway, aside from the limited loan choices tied to this proprietary home loan program, prospective borrowers must also have 700 FICO scores (or higher) to qualify.
So not only do you have to be making a lot, you also have to exhibit fairly excellent creditworthiness too.
A 700 credit score isn’t necessarily anything to brag about, but it means the borrower probably hasn’t missed any payments on other debt obligations, so they’re a fairly safe bet.
Credit and income aside, the zero-down financing is only available on owner-occupied single-family residences and townhomes.
It’s not an option on condos or multi-unit properties. It’s also only available for home purchases. No mortgage refinances allowed.
Lastly, the max loan amount is $475,000 and private mortgage insurance is required.
Enough to Offset Risk?
In other words, Ideal Credit Union is keeping things really specific to avoid any unnecessary risk.
My assumption is they’re going to keep the loans on their books, so they’ll want to know homeowners can actually pay the mortgages over time.
This gives them an edge over other mortgage lenders that may just stick to the agency underwriting guidelines of Fannie Mae, Freddie Mac, and the FHA.
All in all, it’s an interesting spin on a zero down mortgage loan, and something I’ve never seen before.
Typically, you see a combination of no down payment and a mortgage with a long loan term to boost affordability. Not the case here, and that might be enough to attract only the best borrowers and give them the ability to offer the program to begin with.