Usually when you hear about banks offering home loans with low down-payment requirements, it’s intended to attract first-time homeowners who may not have the tens of thousands of dollars it can take to make the full 20% upfront payment. However, some banks in high-priced areas in and around Silicon Valley are using 0% down-payment loans in an attempt to attract well-heeled tech employees.
Bloomberg reports that lenders in the San Francisco Bay area are elbowing each other to court tech employees looking to buy homes, offering them deals such as no down payment loans, or 24-hour guarantee approval.
For example, one of these lenders, San Francisco Federal Credit Union, is offering zero-down mortgages on homes costing up to $2 million. That means the home-buyer would not be required to plunk down upwards of $400,000 before moving in.
Of course, while eliminating a down payment might help a homeowner save in upfront costs, it also means the total loan being taken out is more — and, in turn, payments can be higher.
Still, SFFCU points out that its new practice doesn’t mean it automatically approves mortgage applications for everyone.
The company says it has rejected four in 10 applicants, and only approves people who have an average income of $219,000 and a FICO score of 747, Bloomberg reports.
“We are vetting our borrowers to make sure they can afford it and have reserves,” SFFCU chief lending officer, Rebecca Reynolds Lytle, told Bloomberg. “It’s a loan — it’s not going to be risk free.”
Still, Bloomberg reports that since beginning to offer the option in December, SFFCU has more than $100 million pre-approved for 30-year adjustable-rate mortgages in what’s called the Proud Ownership Purchase Program for You.
Banks like SFFCU and First Republic Bank — which has branches in the headquarters of Facebook and Twitter — say the new approach is a response to the usual housing market and employment compensation in the area.
Because many of the tech companies’ compensation packages include shares that aren’t liquid, some homebuyers have a difficult time determining if they can even afford to purchase a home in the area.
For that reason, lenders have enlisted the help of financial advisers to run new software that factors in debts and future income, including the stock, and other costs.
“In a weird housing market, in a place where a lot of assets are not liquid, it helps to have their kind of modeling,” one homebuyer who went through the process tells Bloomberg. “They’re catering to people scared by this scary real estate market.”
While lenders and borrowers may contend that the unusual market calls for unusual mortgage processes, some advocates worry the idea of guaranteed mortgages could cause another housing bubble.
“Lenders get so caught up trying to stay competitive and finding a market edge, they basically allow greed to overcome common sense,” Terry Wakefield, a mortgage consultant, tells Bloomberg. “Easy money does fuel and accelerate the inevitable bubble.”
Others say the option, while it might be helpful, shows that lenders may be destined to repeat past mistakes.
“Given what we went through in 2008, zero-down financing is suicidal for our country,” Chuck Green, CEO of Bay Area Capital Funding Inc., says. “We have to learn from our mistakes.”
Silicon Valley Elites Get Home Loans With No Money Down [Bloomberg]
by Ashlee Kieler via Consumerist
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