Home Loans With Low Down Payments Are Back in Vogue

High-leverage, low down payment loans are growing in popularity--again.

Despite the losses being sustained by lenders who are foreclosing on homes where the borrower’s equity has evaporated, lenders are now making new loans with only 3% and 5% down payments required.

“There are more low down payment loans today than ever before,” said John Lucas, vice president of ARCS Mortgage Inc. in Van Nuys, a Bank of New York company. The Federal National Mortgage Assn. (Fannie Mae), a federally sponsored agency that insures lenders on residential mortgages, is offering at least half a dozen low down payment programs, in cooperation with the California Housing Finance Agency.

Each of the loan programs has its own rules. Some loans require that the borrower be a first-time home buyer; some require that the borrower not have owned any real estate in the last three years. There are various loans based on certain income limits, while others instead are limited to certain geographic areas. There are also loans with sales price and loan limitations, while other loans have no such restrictions.

The smaller the down payment, the greater the loan balance and the more income needed to qualify, of course. But debt and income ratios are somewhat more lenient these days, Lucas said. Lenders, in conjunction with Fannie Mae, are providing first-timer buyers with the chance to get certified by attending home buying classes. After certification, borrowers can spend up to 33% of their income on housing instead of the more usual 28%.

“Now is a time when many people have the opportunity to buy with a very low down payment,” Lucas said. “The sad thing is that many renters could have enough for one of these programs, but they aren’t trying because they think they won’t qualify. My advice to them is to try.”

“We’re seeing many more highly leveraged loans,” said Ann Carlton Bose, president of both Estate Funding Inc. in Woodland Hills and the California Assn. of Mortgage Brokers’ L.A. County chapter. “There are several different programs available with just 5% down,” she explained. And these loans amounts can run up to $400,000, she said.

There is also a selection of 3%-down loans, said Bose. Fannie Mae, for example, has different programs available that allow the borrower to put 3% down and get a loan of up to $203,150. Another 2% of the down payment can come from family or friends. Even the lender can kick in the extra 2% by charging a higher interest rate over the course of the loan and essentially refunding 2% of the purchase price to the borrower for part of the down payment.

Fannie Mae’s Community Homebuyers program also allows buyers to get into a home with no reserves set aside for the first several months of mortgage payments and other expenses--as are required for most loans.

Some loans have a maximum income of $53,250. Other Fannie Mae loans are restricted instead to certain low-income target areas.

A low down payment loan program is offered by several private lenders as well. One, a Countrywide Funding-sponsored loan, is available with as little as 3% down, and there is no income limit for borrowers within the city of Los Angeles, said Ralph Mozilo, executive vice president of Countrywide Funding Corp.

The typical borrower is an individual who is paying a mortgage that is pretty similar to his or her rent, Mozilo said. Mozilo directs his underwriters to be flexible, he said. “I want our underwriters to not just be credit scorers. We are all going through a learning process. There are things other than numbers that we have to look at.”

“In the past we would hardly ever list a 5% (down payment) loan because borrowers would call us to complain that the loan wasn’t really available,” recalled Earl Peattie, president of Mortgage News Co. in Santa Ana, publisher of the weekly Home Mortgage Guide. “Now, these loans are actually available.”

The two drawbacks to a low down payment, Peattie said, are that the borrower needs to borrow more, and that there is a higher private mortgage insurance premium. PMI is required for most low down payment loans and can range from 1% to more than 2% of the principal balance.

Buyers can employ all sorts of strategies when they don’t have much money for a down payment.

Veterans can qualify for Veterans Administration-backed loans of up to about $184,000 with basically no down payment at all. A certificate of eligibility from the VA is required.

Federal Housing Administration loans of up to $151,750 are available to just about anybody--there’s no income limit. There is, though, an up-front mortgage insurance premium of about 2.25% of the loan amount and additional monthly, or mutual mortgage insurance (MMI), which is different from PMI.

Developers and some lender/owners are offering special low down payment incentives too. At Forest View Estates in Sylmar, 22 new homes are being offered to buyers starting at $206,000.

Buyers can get in the door with just 3%, or $6,180. Another 2% of the down payment is being made by the lender as a subsidy. The catch, though, is that the 30-year, fixed interest rate is about 9.5%.