The low-down on an alternative mortgage
Wells Fargo & Co. has started offering a new type of mortgage that requires a tiny down payment and could appeal to customers who might otherwise get loans backed by the Federal Housing Administration.
Most big banks have pulled back from offering FHA loans after dealing with lawsuits and billion-dollar settlements connected with underwriting problems. Wells Fargo had been the exception, but with its new loan program, called Your First Mortgage, the San Francisco bank could soon be making fewer FHA loans.
“We think this will be a very attractive alternative,” said Brad Blackwell, executive vice president of Wells Fargo Home Mortgage.
Your First Mortgage requires a down payment of just 3 percent of a home’s purchase price, smaller than the minimum 3.5 percent down required for FHA loans.
Other lenders, too, including Bank of America and JPMorgan Chase, have begun offering non-FHA mortgages requiring small down payments, though some loans are available only to buyers who meet certain criteria. Bank of America, for instance, started offering a 3 percent down-payment mortgage this year, but buyers must make no more than the median income in their area.
The FHA program targets low-income and first-time homebuyers by insuring their loans, which allows borrowers to pay lower rates while giving investors confidence to invest in bonds backed by those loans.
But banks have to certify to the FHA that information about their loans is accurate. When problems turn up, banks can be forced to not only buy back the loan but also pay damages. In April, Wells Fargo agreed to pay $1.2 billion to settle allegations that it improperly certified some loans as meeting FHA requirements.
Loans issued through the Your First Mortgage program will be sold to Fannie Mae, the government-sponsored lending giant created to increase liquidity in the mortgage market. Blackwell said if any loans issued through the new program later turn out not to meet Fannie Mae underwriting standards, the bank typically only has to repurchase the loan.
“There’s not the additional penalties that might come with FHA,” he said.