A mortgage that is as close to zero out of pocket as one can get is available in San Diego County from a Utah-based Native American tribal corporation.
Aimed at low-income buyers, the Chenoa Fund has looser requirements than many down payment assistance programs, even as one of the nation's largest mortgage sources cuts back on very low down payment approvals.
Chenoa Fund requires a 620 credit score, a debt-to-income ratio higher than most low down payment programs, and it will give a 3.5 percent down payment as a gift provided the applicant makes 115 percent or less of the area median income — about $92,000 in San Diego County. (No homebuyer class is required.)
The catch is most buyers who use Chenoa will likely end up with about a 1 percent higher interest rate, meaning a home will cost more over time. Chenoa charges lenders more for its product than other similar loans, so most will have to charge the buyer a higher interest rate. Also, the buyer would still need to come up with $6,000 to $8,000 in closing costs.
Other things to note about the loan:
- The 3.5 percent gift has a three-year requirement that the applicant make all payments on time and continue to make 115 percent or less of area median income.
- There is no requirement to be a first-time homebuyer, like many low down payment programs.
- Most down payment assistance programs limit debt-to-income ratios to 45 percent, but Chenoa uses regular Federal Housing Administration, or FHA, guidelines that allow up to 55 percent debt to income.
Matthew Shaver, a San Diego senior mortgage consultant at Finance of America, said the Chenoa Fund would not be the first choice for his clients because other down payment assistance programs have lower interest rates.
"There's just so many other options," he said.
Shaver said he prefers his clients who need down payment assistance choose loans from the Golden State Finance Authority or California Housing Finance Agency, or CalHFA, because its rates are lower and it's less money out of pocket.
However, he said if a client has a debt ratio above 45 percent and their credit score is below 640, but has money for closing costs, Chenoa may be the best option.
The Chenoa Fund program is a product offered by the CBC Mortgage Agency, a subsidiary of the Cedar Band Corp., which was founded by the Cedar Band of Paiutes of the Paiute Indian Tribe of Utah.
The federally chartered tribal corporation has a beverage company, retail store, staffing company and other services. It formed the mortgage company in 2013.
Michael Whipple, vice president of Chenoa Fund, said its program is aimed at helping people who normally might not be able to buy a home but, with assistance, could make payments and start building equity.
He said the fund is different from so-called "liar loans" popular before the recession, where mortgages were given with limited documentation about income or assets.
"There's a need out there in the marketplace," he said. "People confuse down payment assistance with some of the easy credit that was available (in the housing crash). This kind of financing isn't what caused the meltdown."
The 620 minimum credit score is lower than other down payment assistance programs that require at least 1 percent down. San Diego-based Guild Mortgage's program has a minimum score of 680, as does Quicken Loans and Guaranteed Rate. United Wholesale Mortgage requires a score of 720.
In June, the average FICO score for home loans at Fannie Mae and Freddie Mac was 754, said The Washington Post.
The Chenoa Fund's availability in San Diego comes as Freddie Mac cuts back on very low down payment approvals. The mortgage giant announced in early August that borrowers have to come up with at least 3 percent of the value of a home from their own personal resources.
Mark Goldman, a loan officer and real estate lecturer at San Diego State University, said he understands the lack of "skin in the game" argument for low down payment options but that it might be the only path to homeownership for some.
"Anything that helps people come up with the down payment is useful to a lot of families," he said. "I think it creates additional risk when someone purchases a home with no skin in the game. But, should it be required every time? No."
Goldman said high rent prices in San Diego make the monthly payments on a house comparable and noted that many loans from the Department of Veterans Affairs, called VA loans, already allow veterans to get into the house with zero down.