Many San Diegans would like to own a home in the region they work in, but they often struggle with the large down payment.
Buyers are typically expected to put 20 percent down on a new home, about $105,000 based on the county’s median home price.
Gearing up for a new generation of buyers, San Diego-based Guild Mortgage has launched a 1 percent down payment mortgage that has some of the easiest debt requirements on the market.
Other lenders — Quicken Loans, Guaranteed Rate, United Wholesale Mortgage — have 1 percent down programs, but Guild Mortgage allows the borrower to have the most debt and allows for more sources of income, said an analysis by HousingWire.
Under Guild’s program, a borrower could pay as little as $3,000 down for a $300,000 condo on a 30-year fixed rate mortgage. The applicant would need to prove their debt-to-income ratio is 50 percent — much higher than that what most lenders typically approve — or lower.
Monthly home payments would start at $1,388, but would go higher with interest, taxes and private mortgage insurance.
A few caveats: The borrower must have a credit score of at least 680, be willing to take homeownership education classes and, if debt-to-income is more than 45 percent, prove they have additional sources of income.
So, how’s it work?
The program combines a borrower’s down payment with a 2 percent grant from Guild that does not need to be repaid, similar to grants offered in other 1 percent down programs. What Guild says makes its program unique is non-borrower income can be used to qualify, such as money from a parent, and boarder income, such as a renter who will live at the residence.
David Battany, Guild’s vice president for capital markets, said it decided to offer the 1 percent down payment option because of the large number of people who could afford a home but struggle with the down payment.
“This is mostly aimed at first-time homebuyers, definitely for people where this is their primary asset, “he said. “They have to live in the home. It’s not an investment.”
The program’s debt-to-income of up to 50 percent is a division of all monthly debt payments by gross monthly income.
Lenders typically prefer no more than a 43 percent debt-to-income ratio because it increases the likelihood the loan will be paid back, said the Consumer Financial Protection Bureau.
It is also the preferred rate for a qualified mortgage, one that shields lenders from lawsuits by borrowers claiming they were stuck with unaffordable loans.
But to some housing experts, 1 percent down loans and high debt-to-income ratios are reminiscent of tactics used in the lending industry before the housing crisis reached critical mass.
Norm Miller, real estate finance lecturer at the University of San Diego, said 1 percent down payment programs ignore a lesson from the housing crash: Not having a high amount of equity in a home can be asking for trouble.
He said a buyer who overpays for a property by 5 percent, but only pays 1 percent down, could quickly find themselves with negative equity.
“That’s not an unrealistic scenario,” he said, noting data from 2005 to 2008 that showed it happening frequently. “It’s déjà vu all over again.”
Miller also said the loans could inflate home prices, driving up costs for lower-priced areas.
Battany said Guild’s program is different from mortgages that were prevalent before the housing crash because it only uses a fixed-rate, unlike many loans before the recession that had adjustable rates. Also, the 2 percent Guild gift means a homeowner moves in with 3 percent equity, not 1 percent.
Miller said that adjustable rate mortgages weren’t the only factor in the crash, but also dropping home values. Defaults don’t typically happen if a borrower’s home has positive equity, he said. When the value of a home drops, that’s a big factor in defaulting — no matter what type of loan.
“The system is not set up to stop people from overpaying,” Miller said.
Guild’s program limits loan amounts in California to $424,100. The conventional loans adhere to HomeReady guidelines created by Fannie Mae.
San Diego was ranked the fourth-worst region in the nation for a first-time homebuyer, said a May study from housing website Zillow. The reasons were the time for a buyer to get to the point where it makes more sense to buy than rent, low home inventory, lower price appreciation than places like Seattle and Las Vegas, as well as very few price reductions once a home is on the market.