Guild Mortgage in San Diego has launched a 1%-down loan program to court millennial borrowers, who tend to lack down-payment resources and have higher debt-to-income ratios.
"The 1%-down product, which does include mortgage insurance coverage, provides a compliment to Guild's existing product menu, which has historically focused on serving the needs of first-time homebuyers," said David Battany, executive vice president, capital markets, at Guild.
Guild provides borrowers with a grant equal to 2% of the loan amount and has negotiated with certain investors to purchase the product based on guidelines created based on Fannie Mae's 3%-down HomeReady product. Nonborrower household income and boarder income can be used to qualify.
"We chose to use the HomeReady guidelines as our base underwriting platform and we have modified certain aspects of the guidelines to fit the intent of this new 1% product," Battany said.
Because some of the loans' characteristics increase certain risks, Guild will be selective about what borrowers it provides the grants and loans to. These include income limits, required homebuyer classes and additional parameters. Income limits do not apply for properties in low-income census tracts.
The program requires a minimum FICO score of 680, the borrower must have at least 1% of their own personal funds invested in the down payment, and subordinate financing is not allowed. Higher DTIs require additional compensating factors.
"We expect these loans will perform very similar to existing 97% LTV programs in the market today, and that the borrower having 3% equity in their home on day one will matter," Battany said.
The company is pricing the 1%-down mortgage as a subsidized product and offering rates compared to the rates charged for a 5%- or 10%-down loan.
"This puts the borrower in a much stronger and more sustainable long-term financial position than if we were to use premium pricing," said Battany.
Guild also has been working to help borrowers meet down-payment requirements by participating in Freddie Mac's pilot for loans with equity-sharing investments from a third party.