Unlike subprime loans that were subjected to minimal underwriting standards in the runup to the housing crash and 2007-09 Great Recession, UWM’s zero-down loans have to meet criteria set by mortgage giant Freddie Mac.

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A new zero-down loan program unveiled last month by the nation’s largest mortgage lender is a hit with homebuyers — but not with some consumer advocates who worry that borrowers will be “instantly underwater” if home prices decline, CNN reports.

United Wholesale Mortgage rolled out the “0% Down Purchase” program on May 15, allowing borrowers who earn less than 80 percent of the area median income to take out a Freddie Mac Home Possible loan that covers 97 percent of a home’s value. UWM then provides a second mortgage for the remaining 3 percent of the purchase price.

With a $15,000 cap on the second mortgage, the program is limited to homes priced at $500,000 or less. Borrowers aren’t charged interest on the second loan, and don’t have to make monthly payments, although it must be repaid if they sell their home or refinance their first mortgage.

Mat Ishbia

Mat Ishbia

“UWM’s 0% Down Purchase program is going to change the game this purchase season,” UWM CEO Mat Ishbia said in an announcement. “No other wholesale lender in the country is offering this, meaning independent mortgage brokers now have a significant advantage with consumers and real estate agents. Thousands of borrowers are sitting on the sidelines because they don’t have a downpayment – this program removes that barrier.”

But homeowners taking out such loans are more likely to end up in foreclosure if they have to sell before they have built up equity in their homes, several academics and consumer advocates told CNN.

“These mortgages are going to be ticking time bombs – just like subprime mortgages –unless home prices continue to increase very substantially,” Better Markets CEO Dennis Kelleher told CNN of UWM’s new offering.

UWM — which last month also expanded a loan program that’s aimed at saving some borrowers time and money by cutting title and settlement services providers out of the process — objects to such comparisons.

Unlike subprime loans that were subjected to minimal underwriting standards in the runup to the housing crash and 2007-09 Great Recession, UWM’s zero-down loans have to meet criteria set by mortgage giant Freddie Mac.

Freddie Mac’s Home Possible and Fannie Mae’s Home Ready programs let borrowers put down as little as 3 percent. Last year UWM, Rocket Mortgage and Zillow began providing grants to allow borrowers who are eligible for those programs to put down as little 1 percent and qualify for a Home Possible or Home Ready loan.

Alex Elezaj, UWM’s chief strategy officer, told CNN that demand for the new zero-down loans that meet Freddie Mac’s Home Possible standards “has been huge. We already have a couple of thousands of loans submitted.”

Some down payment assistance programs in California and other states operate on a similar model, providing second loans with deferred payments that cover down payments on FHA and conventional loans. Last fall, loanDepot started offering fully amortized second mortgages that let borrowers spread out down payments on FHA mortgages over 10 years.

Down Payment Resource, an Atlanta-based technology provider, tracks assistance programs available through federal, state, county or local government agencies that can be accessed through integrations with multiple listing services (MLSs), lenders and agents. Freddie Mac offers a similar tool for lenders, DPA One, that lets lenders enter client eligibility parameters and receive information about down payment assistance programs.

Another option for borrowers scraping together a down payment are Special Purpose Credit Programs (SPCPs) offered by a growing number of lenders to borrowers in underserved areas who might otherwise be denied credit or offered less favorable terms.

Bank of America offers zero down payment, zero closing cost mortgage for first-time homebuyers through an SPCP serving designated markets that include predominantly Black or Latino neighborhoods in Charlotte, Dallas, Detroit, Los Angeles and Miami.

That program is part of Bank of America’s $15 billion Community Homeownership Commitment, which has set a goal of helping 60,000 individuals and families purchase homes by 2025.

Other Lenders that offer mortgages through SPCPs include:

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Email Matt Carter

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