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Should You Get A 1% Down Loan?

Certified Mortgage Advisor
NMLS 1701021
September 20, 2023

Should You Get A 1% Down Loan?

There's a new 1% down loan program that a lot of people have been talking about. And you probably have questions about it as well. Like how much is this going to cost me long term? What's the catch? And I'm going to answer all the questions that people have asked in my previous video on the 1% down loan requirements.

1% Down Loan Overview

First, let's go through a quick recap of what this program is if you're not familiar with it. The way it works is it's 1% down on a conventional loan. So if the home is 300,000, it's a 3,000 down payment. Now you get a total of 3% equity total in this home because you get a 2% forgivable grant. So you get 1%, 2%, 3% total in equity.

So the way that a lot of down payment assistance programs work is there's usually some sort of like string attached, usually that grant or the down payment assistance tends to be a loan, or you have to pay it back. You have to repay it monthly, there might be interest on it.

What's interesting about this program is there's no lien, there's no payback, there's no interest. It's a completely forgivable grant. Meaning that money is 100% yours with no terms attached to it. Now I'm going to get to why in the world is this happening and where's the money coming from and some questions up ahead.

Now there is a minimum of a 620 FICO credit score. However, it's going to be difficult to get approved with a 620. You likely want to have a 640 or higher, 680 is going to be better to get approved for this program. Also, you need less than or equal to 80% of the Area Median Income. 

Area Median Income Lookup tool

So I'll have a link in the description to the Fannie Mae Area Median Income Lookup Tool, but what you can do is find wherever you're looking at buying and be able to see the Area Median Income, which is going to be 80% AMI for instance, in this County is $82,000.

I can even zoom in a little bit, so it's easier to see here, $82,000. So you'll want to look that up. I'll have the link in the description for that. Now, a couple of big pros of this program are there's no Private Mortgage Insurance, which is going to lower the monthly cost for you.

It's for first-time homebuyers or repeat homebuyers. It's only for primary residents. That's a one-unit home. And here's the big kicker it's a max loan limit of $350,000. I know a lot of people are going to complain about the 350. It works for a lot of people, but in a lot of areas, it doesn't work. So something to keep in mind.

Where is the money coming from?

So first, the biggest question that people have is where is the money coming from. So the money is coming from primarily the lender. So what happens is lenders have to, they're required to lend to low to moderate-income areas. A certain amount of their lending has to be in those areas and this is from the Community Reinvestment Act.

So lenders can get back credit for lending in these areas. So that is primarily where the money is coming from. It's a mix of the lenders being required to lend in certain areas, and also a lot of lenders wanting to be competitive with each other. There are two primary lenders, United Wholesale Mortgage and Rocket Mortgage, who compete with each other a lot.

So, you know, one lender will come out with a program and the other lender wants to come out with an even better program. And so that's, what's happened with a lot of these lenders. They're using these as ways to get more clients. Now, some of this money is also coming from Fannie Mae.

So funding for this program comes from a couple of different sources. However, I know that for some of these lenders, this is a loss leader, meaning they're not making any money on this program. That way they can grow their market share as a company. Again, some of this comes from Fannie Mae.

They're offering some credit there. And then also from community reinvestment credits as well. 

Who is offering this program?

You have several different lenders who are offering this. So for instance, we offer this, and we offer programs and all 50 States, if you'd like a free consultation to get pre-qualified, you can go to WintheHouseYouLove.Com.

Now you also have a Rocket Mortgage on the retail side offering this. You have Guaranteed Rate, Guild Mortgage, UWM, and Zillow. I believe Zillow's at the moment is only available in one state, whereas other lenders have that available in multiple different states.

Now each lender has their guidelines with it. So they may be slightly different than what you see in this video. I can only speak on behalf of what we can offer on our team.

Now, most of them, a lot of these lenders have a cap on the grant that you can get usually around 2000 to $4,000. 'cause I've seen a couple people in that previous video. Where they were saying, well, I was told it was only up to 4, 000. And that might be true with another lender, but it's not true with us.  Again, we'll offer this loan in all 50 States, and we would be happy to help you at WintheHouseyouLove.Com.

Is it going to fix the housing market?

Now, I've also seen people saying, well, this isn't going to fix the housing market. Yes, it's not supposed to, no one said, no one designed this program to fix the housing market. 1% down programs tend to come up usually once a year, maybe every two years. Even before this market existed, this frustrating market existed. 1% down programs usually come up, you know, a couple of times every few years, and they usually last 6 to 12 months and then they disappear.

It's a pretty common program that pops up every once in a while. This was never designed to fix the housing market. That is not what is happening. The timing here is simply just a coincidence. Again, not released to fix the housing market. It's been a 1% down loan that gets released almost every single year.

So I don't get why I see people talking about these headlines saying the 1% down isn't fixing the housing market. It's not supposed to not designed that way. 

Why only people who make 80% AMI or less?

Also, why are the only people who make 80% of the Area Median Income or less, why are those the only people who qualify? It's because lenders are required by the federal government to extend credit to moderate to low-income households.

HomeReady and Home Possible

There are programs that have existed even before 1% down called HomeReady and Home Possible through Fannie Mae and Freddie Mac. And so these are offered through really any lender.

Fannie Mae and Freddie Mac are the ones who create the rules for these different types of programs. And they're just conventional loans that are offered to people with 80% or less of the Area Median Income. These programs usually offer a lower interest rate and lower mortgage insurance and don't require you to be a first-time home buyer.

Now, usually, they're 3% down. The 1% down program is just a little bit of an addition to the HomeReady program where you only have to do 1% down instead of 3% down. And you get that other 2% as a grant.

Will your monthly payment be higher?

Let's run through an example here with a $300,000 purchase price, with a normal HomeReady loan, you're gonna have mortgage insurance of just under $95 per month. On the one plus 1% down program, it's $0 PMI for your down payment. On a normal HomeReady loan, for 3% down, it'd be $9,000. On the ONE+ loan, it's $3,000.

Now, when we look at the equity that you have at closing. So how much of that home do you own, in like value $9,000 on the HomeReady program and 9, 000 on the ONE+ program. So even though you're putting 1% down, you still have 2% equity, even though you put 3% or 3, 000 down, you have 9,000 in equity if you were to sell the home.

Now, another question is, well, if I'm putting 1% down, I'm going to pay thousands and thousands of dollars in interest. And people are forgetting you're getting a 2% grant. This program is no different than you putting 3% down, which is what tons of homebuyers do.

LoanClarity Advisor

So we're going to run through an example with a tool that I created called the LoanClarity Advisor, it helps you compare loan scenarios to pick the best loan option. So let's look at a scenario for a 350,000 purchase price. And we're going to assume we have a 720 FICO credit score.

Our first loan option here is if we were looking at a standard HomeReady loan. This is a conventional loan type, with a 3% down payment, of 30 years. Our interest rate at the moment is going to be close to 7. 125%. The average conventional rate right now is 7.3, so HomeReady loans tend to be lower than a standard conventional loan.

Again, there are two common types of conventional loans. You have a standard conventional, and then you have a HomeReady conventional. Now we're not going to look at points or lender fees on this one. But mortgage insurance PMI is going to be around 130. Now let's add a second option.

Let's add our ONE+ loan

This is gonna be a conventional loan as well. Now, our down payment, I'm gonna put in here 3%. Now the reason why I'm doing that is at closing, you only have to pay 1%, but since you're getting a 2% grant, there's a total 3% of a down payment in here.

So 3%. Now, what's interesting about the ONE+ program is that often it will have a slightly higher interest rate, and I'm gonna show you how you can combat that. So I'm gonna put in 7.375. Zero points on this, zero lender fees. And let's take a look at mortgage insurance is zero on the ONE+ program. And the reason we're not looking at lender fees right now is just because we just want to compare the loans themselves. And if there was a lender fee, it would be the same across all these loans.

Now, let's go ahead and look at the results. Let's say five years, the ONE+ program is going to save us about $3,300. Now, if we look at, let's say 10 years, it's going to save us, $6,156 to go with the ONE+ program. 

Let's look at the breakdown

Why is it, why is it happening this way? Well, we have zero finance mortgage insurance, but on the HomeReady loan, we're paying 14,000 in mortgage insurance. Compared to the ONE+ program, which is 0 in monthly mortgage insurance. Even though the interest rate is higher, the amount of mortgage insurance that we have to pay is higher than the interest cost. So we can see the ONE+ loan is better.

Now, what a lot of people don't like is having a higher interest rate. On the HomeReady loan, it was 7.125. On the One+ loan, it's 7.375.

One+ Buy Down

So what you could do is let's simulate if we lowered the interest rate on the ONE+ loan by paying discount points. So I'm gonna call this One+ Buy Down.

So conventional loan, 3% down, even though we're doing 1% down at closing and getting a 2% gift, let's say our interest rate was 7.125%. Now, at the time of recording, this would cost about 1,500 in points. So points are similar. Think of them like prepaid interest. We pay money upfront to get a lower interest rate.

The goal is to recoup that money over time through our monthly savings. Now there's again, zero mortgage insurance on this loan. So now if we look over 10 years, this buy-down loan will save us $13,000 over a standard HomeReady loan. So not only did we have a smaller down payment, but we're also saving a lot more in interest savings and mortgage insurance savings over time.

Now, if we also look at the monthly payment, you can see in red, this is the mortgage insurance on a HomeReady loan.

You can see right when we get to year 12 when the mortgage insurance will drop off of the HomeReady loan, but it doesn't exist at all on the ONE+ program.

So in year one, our monthly payment, you can see the payment inclusive of mortgage insurance and taxes here as well. HomeReady is going to be close to $3,000 per month. The ONE+ program would be $2,930 per month and the Buydown option would be $2,872 per month.

Now, if we look at, let's say year 10, you can see HomeReady is going to be $2,986 per month, the ONE+ is $2,929 and the Buydown is $2,872 per month.

So when we go to the question of putting less down, I'm going to spend so much more money and interest. It's just not true. Especially if you look at the buy-down option by removing the mortgage insurance and not having that on the loan, you're going to save a lot of money. Even though you have a slightly higher interest rate.

When will it run out?

There's no better answer than no clue. Even when we ask these lenders that are providing it, there isn't an exact date of when this money is going to run out. However, a lot of people are predicting that it could run out by the end of the year, possibly mid-next year.

I'm not saying that in a way to try to get you to get into this program early. I'm not trying to create any scarcity here. It just, we don't know. It's possible that in a few months, the program could still be here. It's possible that in a year or so, the program could still be here. It's just unclear.

So I would say if this is a program that you need, you probably want to move on it sooner rather than later. However, it's not the end of the world if you miss a program like this. The difference is 3% down as a minimum, as opposed to 1% down. However, most programs like this historically last six months to a year.

Is the income limit based on the household?

Another question is, is the income limit based on the household income? So no, it's only going to be based on who is on the loan. So for instance, if you and your spouse are looking at buying a house, let's say both of you are above the income limit. As long as we can qualify you for the loan with just one income, then we can be able to prequalify you for the loan.

Then your spouse can be added to the title without being added to the mortgage. USDA looks at things like household income. This loan program does not, it only looks at the income at the time of closing. So your income can go up afterward and you're fine.

Can you exclude your spouse from the income limit?

So yes, if you can qualify for the mortgage on your own without your spouse, then you can exclude them from being on the mortgage. And again, we'll just put them on the title. So your spouse can be on the deed to the home without being on the mortgage to stay under the income limit.

Can you exclude variable income?

Yes, the qualifying income is the only income that counts toward the income limit. So variable income is things like overtime commission and bonuses. Can be excluded from the income limit. As long as you can still qualify for the loan without them. And this is what we mean by debt-to-income ratios. So we can help you with this.

This is not stuff that you have to figure out on your own. We'll do this on a prequalification call. If you go to WintheHouseYouLove.Com. But this is something we can do if, you know, you got some nice bonuses over the past couple of years.

If you don't need that to qualify for the loan and the debt-to-income ratio, we can remove it from the qualifying income so you can be under the income limit here.

Is this legal?

I did see somebody ask if this is legal. They're like, I don't even understand how this is legal. This is a written guideline that Fannie Mae has. This is completely legal and within the guidelines for Fannie Mae's conventional loans.

Will you get the LLPA waiver?

Also, will you get a Loan Level Price Adjustment waiver? I have a video about Rate Hacking and this is where I show you how interest rates are created and how you can get the best interest rate. In that video, I talk about, Loan Level Price Adjustment waivers, which help lower your interest rate.

So all HomeReady loans have the interest rate waiver built in. There's nothing that you have to do, but just know that HomeReady loans like this are going to have a lower interest rate than standard conventional loans. So you're putting 1% down. 

Can closing cost be covered?

So what about Closing Costs? Can Closing Costs be covered? So yes, you have these closing costs covered by the Seller. So the loan has standard closing costs just like any other loan, closing costs are going to be roughly two to 4% of the purchase price. And these makeup things like your appraisal, a title search, recording fees, possibly transfer taxes, property taxes, homeowner's insurance, and different things like that, that are going to be required on every single loan with every lender.

You can request 3%

So what you can do is you can request up to 3% of the purchase price towards your closing costs. And this happens when you make an offer on the home with a real estate agent. So what you'll do when you put in an offer is you might say, Hey, we'd like to get 2% of the purchase price towards our closing costs on a $300,000 home, that would be 6,000 to pay your closing costs which should cover a good portion of your closing costs if not all of them.

This is negotiated at the time of offer

It's important to remember this can make your offer less attractive to a seller because that's money coming out of their pocket. So if you're in a competitive market, it may be difficult to ask for seller credits. However, you can also increase the purchase price in some cases to get a credit back from the seller. You just wanna work with an experienced real estate agent who can help you with this.

If you're interested in connecting with a real estate agent that we can recommend, you can go to WintheHouseYouLove.com/agent. For our real estate referral network.

Can you refinance?

Can you refinance a lot of down payment assistance programs have restrictions on when you can refinance. And if you have to pay back the money, this again is a no-strings-attached grant. So you can refinance at any time. It works just like any other refinance from a standard conventional loan, and there are no restrictions from the grant.

So in theory, you could buy this by home with this loan, refinance the next day. If you want it to financially, that wouldn't make a lot of sense, but you could absolutely do it. There's no restrictions on that.

What if your income increases later?

The income limit only applies to the income at the time of purchase. So if you get a raise afterward, that's perfectly fine. The lender is not going to look at your income again.

Why doesn't this work in expensive areas?

Again, this is not made to fix the housing market. This is in no way, it's more just a coincidence that this program exists now in this market.

Not for California

This loan is designed for low to moderate-income households. So I get it. It's not going to work in California. Like I feel like some people have that like copy and paste just ready to go on every video. It's not going to work in California. I understand. This isn't designed to work in California or highly expensive areas.

This loan program is designed for low to moderate-income households and the areas where the majority of people live. Again, this loan has a max loan of $350,000. So it's not going to work in really inflated markets.

Now, if you want to learn more about this program, watch this video to cover all of the guidelines in depth.

Ask us a question →
Kyle Andrew Seagraves is Federal Mortgage Loan Originator (NMLS 1701021) licensed in all 50 states with the Dan Frio Team at Servbank, sb (NMLS 203463), an Equal Housing Lender. Separately, Kyle owns Win The House You Love LLC, an education company. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This website is only for educational usage. All calculations should be verified independently. This website is not an offer to lend and should not directly be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate, legal, and/or financial advice.

Servbank, sb is not affiliated with the VA, FHA or any other government agency. This site has not been approved by any government agency.

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