“Affordable Loan Solution” Offers 3% Down Loan
A new loan program requires just 3 percent down and no mortgage insurance.
The “Affordable Loan Solution” mortgage is a new conventional loan program from Bank of America intended to be a less expensive option than the popular FHA-backed mortgage.
Low- to no-downpayment loans are popular among home buyers. Mortgage rates are incredibly low, and rental payments are expected to increase significantly in the future.
However, new homebuyers are finding it difficult to come up with 20% of the home value upfront. Fortunately, borrowers don’t need to put 20% down. In some cases, they will only need to put 3 percent down, and potentially, home buyers may not need to make a downpayment at all.
With today’s low mortgage rates, lenders are rolling out programs that make it easier for a home buyer to get accepted for a low downpayment loan. The new 3% down loan is just one of many low downpayment loans available to those looking to get a mortgage.
New Low Down Payment Home Loan Only for Certain Buyers
This home buying program targets a specific group of aspiring homeowners.
Not every home buyer will be eligible. Some will not meet credit score minimums. Others might earn an income that lies outside of eligible levels.
Applicants must meet the following requirements.
- They must make less than their area’s median income
- They must have a credit score of at least 660
- They must purchase the home as their primary residence
The loan was created to give potential FHA borrowers another mortgage loan option. This new loan could save borrowers over $100 a month in payments on a $150,000 30-year fixed rate mortgage near current interest rates, as compared to a similar FHA loan.
While an FHA loan has more flexible eligibility, those that meet the requirement for the “Affordable Loan Solution” loan may find that it is a better option for their budget.
Mortgage Insurance Requirement Waived
Along with the benefit of a low down payment, this new mortgage program will not require private mortgage insurance (PMI).
The appeal to avoiding PMI payments is monthly payments will be lower. PMI was created to allow home buyers to get loans even if their down payment was below the 20% threshold. If a borrower gets an FHA loan and puts 5% down, they would be required to pay PMI. PMI can significantly increase your monthly mortgage payment in exchange for the benefit of a reduced downpayment.
This new loan program is backed by Freddie Mac and non-profit Self-Help, so the borrower doesn’t need to pay any form of mortgage insurance premiums. This could save home buyers a decent amount of money over the life of the loan — money that can instead go to increasing your home equity.
Other loan options may still be a better fit for some home buyers than Bank of America’s new program. Their minimum credit score of 660 is higher than the FHA loan, which requires just a 580 score to qualify for the 3.5% minimum down payment.
Roughly half of the country has a credit score below 660. This, along with other restrictions, may make it difficult for some home buyers to get approved for a conventional mortgage.
Plus, Bank of America has not specified what their mortgage rates are on this program. Even without PMI payments, the new loan program could mean a higher interest rate than FHA, Conventional 97 or HomeReady loans, depending on your financial situation.
Other low down payment options available
Bank of America isn’t the only lender offering 3 percent downpayment loans. Large and small mortgage lenders and banks across the country offer low downpayment loans that are not specific to a single lender.
The HomeReady Mortgage
HomeReady is a Fannie Mae program that allows 3% down and a credit score of just 620. Guidelines limit the amount the eligible applicant can make in some areas of the country. In areas considered underserved, there is no income limit.
This loan is considered the first multi-generational loan, since buyers can use the income of non-borrowing household members to help them qualify. Adult children can qualify more easily when buying a bigger home they plan to live in with their elderly parents.
Conventional 97 Mortgage
The Conventional 97 loan also requires just 3% down with a low credit score of 620. Borrowers will have to pay PMI, but on a 30-year fixed-rate mortgage these payments will go away after 10 years.
Quicken Loans has their own 3% down mortgage program called the Home Possible mortgage. While it does require PMI, borrowers can have a higher annual income with Home Possible than with Bank of America’s loan.
If borrowers are looking for low down payments, a USDA loan should not be overlooked. USDA loans require 0% down payment and the minimum required credit score is 640. Also, they do not require PMI, but rather an annual fee that is usually much lower than most mortgage insurance.
USDA loans are only available in areas that are less dense in terms of population, but many suburban areas are eligible. Borrowers may also make up to 115 percent of their area’s median income, making these loans less exclusive than most low-to-no down payment mortgages.
For home buyers with qualifying military service, a VA-backed mortgage loan is an attractive option. These loans are available with no down payment and lower interest rates. Borrowers won’t have to pay mortgage insurance either though there is a one-time funding fee that allows the program to be self-sustaining and is significantly less than monthly mortgage insurance premiums.
The best loan option not only depends on your down payment but also on your mortgage rate.
Mortgage rates change daily, and lower rates can make it even easier to afford a new home with a low down payment.