Industry standards say that homebuyers should expect to make at least a 20% down payment. In reality, however, not everyone can afford to do that. Down payment assistance plans and mortgages with zero or low down payments can relieve some of the financial burden that’s often felt by low- and moderate-income individuals. The Affordable Loan Solution plan is the newest loan program to enter the mortgage market with the goal of assisting financially strapped borrowers.
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What Is the Affordable Loan Solution Program?
The Affordable Loan Solution plan is the product of a collaboration between Bank of America, Freddie Mac and a credit union called the Self-Help Ventures Fund. Instead of having to make a 20% down payment, qualified homebuyers only have to make 3% down payments. That can be great news for folks who might otherwise have trouble buying a home.
Before you apply for an Affordable Loan Solution mortgage, it’s best to check your credit score. To be eligible for this program, you must have a FICO credit score of at least 660. Plus, you must be shopping for a single-family home that you plan to make your primary place of residence.
Under the terms of the new mortgage, loan counseling is mandatory for all first-time homebuyers. Homeowners who later default on their loans or who find their mortgage payments to be too expensive can take advantage of additional counseling offered by the Self-Help Credit Union.
Related Article: What You Should Know About Down Payment Assistance
How it Compares to the FHA Loan Program
The Affordable Loan Solution program is expected to rival the Federal Housing Administration’s own special initiative that targets homebuyers with low credit scores and those who don’t have enough cash to cover a big down payment. On the surface, the new loans may seem more attractive than FHA loans, which offer government-insured mortgages that require a 3.5% down payment.
With an FHA loan, you have to pay for private mortgage insurance (PMI). PMI annual premiums vary depending on the length of the loan term, the size of the loan amount and the loan-to-value ratio. But upfront, you’ll pay 1.75% of whatever you borrow. That’s equivalent to $4,375 on top of a $250,000 FHA home loan. When you qualify for an Affordable Loan Solution mortgage, you can avoid paying for PMI altogether.
But FHA loans might be more appealing to borrowers with serious credit problems. You might even be able to get one if your credit score falls in the 500s. And FHA loan lenders tend to be more lenient when it comes to things like debt-to-income (DTI) ratios and income levels. Generally speaking, if you want an Affordable Loan Solution mortgage, you can’t have a DTI above 43% or make more than 100% of the area median income set by the Department of Housing an Urban Development.
At the same time, under the new Affordable Loan Solution program, lenders can look beyond traditional credit scores and consider other factors, including utility bill payments. And unlike with the FHA loan program, you won’t need any cash reserves if you’re eligible for the new home loan program. FHA loan applicants might need reserve funds, especially if they have high debt-to-income ratios.
Related Article: FHA Loan Qualification
How the Affordable Loan Solution Program Works
Once Bank of America creates an Affordable Loan Solution mortgage, the Self-Help Credit Union will purchase it and help protect borrowers from default. In the event of a default, the credit union will agree to cover a large percentage of the losses. That’s why there’s no need for private mortgage insurance. Finally, Freddie Mac buys the loan from Self-Help.
Loan amounts are available up to the conforming loan limit, or $424,100. Borrowers who don’t have enough funding to keep up with monthly mortgage payments can turn to grants and secondary loans, if necessary.
The Takeaway
With its 3% down payment requirement and its lack of a private mortgage insurance requirement, the Affordable Loan Solution program has the potential to be a viable alternative to the FHA loan program. If they can qualify for the new loan, millennials and other individuals who lack a large lump sum of money might finally be able to call themselves homeowners.
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