1% Down Mortgage Programs - Frequently Asked Questions
Facing issues with housing prices, the top two mortgage companies in the U.S. have made plans to help people with average incomes. Rocket Mortgage, the biggest company in 2022, started a program called ONE+.
The second-biggest company, United Wholesale Mortgage, began their 1% Down loans in April. After Rocket's announcement, they even improved their offer.
This blog will explore everything you need to know about 1% down mortgage programs, so you can decide if it could be right for you.
Table of Contents
- Understanding 1% Mortgages
- 1% Down Program Frequently Asked Questions
- What is the 1% down payment mortgage program?
- Which leading lenders offer these programs?
- How does the 1% mortgage program work?
- Does Rocket's program include private mortgage insurance (PMI)?
- Are there income limits to qualify for the 1% down programs?
- What are the risks of the 1% down payment programs?
- What are other low-down payment mortgage options available?
- Are these 1% down payment mortgages a response to a particular market situation?
- How does the 1% down payment program differ from other low down payment options?
- Are there any restrictions on the type of homes I can purchase with a 1% down mortgage?
- Can I refinance my home if I have a 1% down mortgage?
- How does PMI work in the context of a 1% down mortgage?
- Is there a risk of owing more than the home's value with a 1% down mortgage?
- Bottom Line
Understanding 1% Mortgages
Here's a simple breakdown of how the 1% down mortgages work with the top two lenders.
Normally, to get a HomeReady or Home Possible mortgage, you need to put 3% down. These lenders are helping by paying 2% of that, so you only need to give 1%.
Let's say you want to buy a $250,000 house. Normally, you'd need to pay $7,500 upfront (that's 3%). But with Rocket's new plan, they give a grant to cover $5,000 of that (2%). So, you'd only need to bring $2,500 to the table, which is 1% of the price.
Rocket will also pay for something called private mortgage insurance (PMI). Usually, if you don't give 20% down, you have to pay this extra cost. For a loan of $242,500, this can cost up to $245 every month. But with Rocket, it's free!
Anyone buying a home for the first time or even those who've bought before can get this deal with Rocket. There are no rules on how much property or money you can have, but there are some about how much you earn.
United Wholesale Mortgage also follow the 1% down idea like Rocket. They'll pay 2% of the house price, but only up to $4,000. So, the most you can get help with is a $200,000 house. For a bigger $400,000 loan, they'll cover 1% and you'd need to bring 2% yourself.
1% Down Program Frequently Asked Questions
To assist both potential and current homeowners, we've compiled a comprehensive FAQ section addressing the new 1% down payment mortgage program.
These questions cover the program's basic framework, its advantages, potential risks, and how it fits within the broader housing market landscape.
Whether you're a first-time homebuyer or just looking to stay updated, this FAQ aims to provide clarity and insights on this mortgage solution.
What is the 1% down payment mortgage program?
The 1% down payment mortgage program is a recent initiative by leading mortgage lenders to help borrowers, especially those with modest incomes, enter the housing market more comfortably.
At its core, this program allows eligible borrowers to put down only 1% of the home's purchase price, significantly reducing the upfront financial burden.
This comes as a relief to many, especially in the current market climate where home affordability has been a significant challenge for many aspiring homeowners.
These programs are especially advantageous for those who have stable incomes but might struggle with saving a large sum for a conventional down payment.
Which leading lenders offer these programs?
Two of the nation's largest mortgage lenders, Rocket Mortgage and United Wholesale Mortgage, are spearheading this initiative.
Rocket Mortgage introduced its ONE+ program, while the United Wholesale Mortgage rolled out the Conventional 1% Down loans.
These programs were developed in response to the current housing market dynamics where potential buyers face high home prices and are often deterred by the initial down payment requirements.
By offering such programs, these lenders aim to make homeownership accessible and feasible for a broader segment of the population.
How does the 1% mortgage program work?
In essence, the 1% mortgage program simplifies the down payment process. For conventional mortgages like HomeReady or Home Possible, a 3% down payment is typically required.
In the 1% program, lenders cover 2% of this amount, leaving the borrower to cover only the remaining 1%. For instance, if you were to purchase a $250,000 home, the 3% down payment would be $7,500.
Under the 1% program, lenders like Rocket Mortgage would cover $5,000 (2%) through a grant, and the borrower would only need to pay $2,500 (1%).
This structure immensely reduces the financial pressure on the borrower, making the home-buying process more feasible.
Does Rocket's program include private mortgage insurance (PMI)?
Rocket Mortgage's ONE+ program has an added benefit - it covers the cost of Private Mortgage Insurance (PMI) for the borrower.
Generally, when a borrower cannot make a down payment of 20% or more, they are required to pay for PMI. This insurance protects lenders in case of loan default.
By covering the cost of PMI, Rocket Mortgage's program further eases the financial burden on homeowners.
For instance, on a $242,500 loan, PMI could be as high as $245 monthly. Rocket Mortgage absorbing this cost is a significant monthly saving for the homeowner.
Are there income limits to qualify for the 1% down programs?
Yes, there are income restrictions associated with the 1% down programs. Both HomeReady and HomePossible loans, which the 1% down initiatives build upon, set an income cap.
Specifically, a borrower's income cannot exceed 80% of the median income in the area where they intend to buy. This percentage translates to different actual income values depending on the area.
For instance, in Atlanta, the cap is at $76,560, while in San Francisco, it's $120,880. It's crucial to check specific local limits, which can be found on Fannie Mae's website, to determine eligibility.
What are the risks of the 1% down payment programs?
While the 1% down programs are enticing, they're not without risks. For one, lenders might alter the terms based on market conditions or financial considerations.
Moreover, if home values decline, borrowers might find themselves in a position where they owe more than their property's market value.
A declining property market might result in situations reminiscent of the Great Recession where many homeowners found themselves "underwater" on their mortgages.
However, it's important to note that today's mortgage market and housing sector are more robust and regulated than in the past, providing some level of assurance to borrowers.
What are other low-down payment mortgage options available?
Several other mortgage options cater to potential homeowners who might struggle with high down payments.
FHA loans, insured by the Federal Housing Administration, allow for a 3.5% down payment for those with a credit score of 580 or above.
Another alternative is USDA and VA loans, which require no down payment.
It's crucial for borrowers to research and understand these alternatives to select the best fit for their circumstances.
Are these 1% down payment mortgages a response to a particular market situation?
Yes, the 1% down payment mortgages emerged as a direct response to the current housing market's challenges.
With home prices near record highs and mortgage rates seeing a considerable increase from two years ago, potential buyers found it challenging to step into the market.
These 1% down payment programs were introduced to alleviate some of these barriers and encourage more people to consider homeownership.
It's an effort to balance the playing field and offer solutions to the affordability challenges many face today.
How does the 1% down payment program differ from other low down payment options?
The 1% down payment mortgage is a unique offering that stands apart from other low down payment options primarily in how the down payment is sourced.
In this program, lenders such as Rocket Mortgage and United Wholesale Mortgage provide 2% of the 3% down payment needed for certain types of loans. This means that the borrower only has to provide 1% of the down payment.
Other programs might require higher down payments or come with different stipulations. For instance, FHA loans require a 3.5% down payment but come with added insurance costs if you don't put down at least 20%.
Are there any restrictions on the type of homes I can purchase with a 1% down mortgage?
The 1% down mortgage program is primarily tailored for those purchasing primary residences.
The exact type of homes you can buy may vary depending on the lender and the specifics of their program. However, it's generally expected that the homes should be in good condition and meet certain safety standards.
High-value luxury properties or investment properties might not be covered under this program. Always consult with your lender for specific property eligibility criteria.
Can I refinance my home if I have a 1% down mortgage?
Yes, you can refinance a home purchased with a 1% down mortgage.
However, the terms and conditions for refinancing might differ based on your home equity, current market conditions, and your financial standing.
Given that you started with a low down payment, it's crucial to check if the home's value has appreciated sufficiently to offer favorable refinance rates, especially if you aim to avoid private mortgage insurance (PMI).
How does PMI work in the context of a 1% down mortgage?
For the 1% down mortgage program, Rocket Mortgage, for instance, covers the cost of private mortgage insurance (PMI) for the borrower.
Typically, when you put down less than 20% on a conventional loan, you're required to pay PMI. This insurance protects the lender if the borrower defaults.
With the 1% down program, this added monthly cost is taken care of, making the mortgage more affordable for the borrower.
It's worth noting that PMI arrangements might vary across different lenders.
Is there a risk of owing more than the home's value with a 1% down mortgage?
There is a potential risk, as with any mortgage where a small down payment is made.
If home values decline in your area, there's a possibility you might owe more than the house is worth, especially since you start with little equity. This is known as being "underwater" on your mortgage.
However, it's worth noting that the housing market and lending practices are more robust now than during past downturns, such as the Great Recession.
Borrowers should remain informed about local housing market trends and consider obtaining a fixed-rate mortgage to mitigate risks.
The 1% down payment mortgage program offers an appealing pathway for individuals, especially those with modest incomes, to step into homeownership.
With leading lenders like Rocket Mortgage and United Wholesale Mortgage backing such programs, it's clear there's momentum in the industry to provide more accessible routes to buy a home.
While the lower upfront costs might seem attractive, it's essential to understand the long-term implications of such a mortgage and how market fluctuations might impact your equity.
Always consult with mortgage professionals like MakeFloridaYourHome, keep an eye on market trends, and remain informed to make the best decision for your individual circumstances.
With over 50 years of mortgage industry experience, we are here to help you achieve the American dream of owning a home. We strive to provide the best education before, during, and after you buy a home. Our advice is based on experience with Phil Ganz and Team closing over One billion dollars and helping countless families.
About Author - Phil Ganz
Phil Ganz has over 20+ years of experience in the residential financing space. With over a billion dollars of funded loans, Phil helps homebuyers configure the perfect mortgage plan. Whether it's your first home, a complex multiple-property purchase, or anything in between, Phil has the experience to help you achieve your goals.