Low Down Payment Minority Mortgages Still Bring Risks and More News

One of the country’s largest banks recently made a splash when it announced a generous lending program aimed at narrowing the nation’s wealth gap, but it’s not the only lender seeking to address this persistent problem.

Similar to Bank of America’s new affordable lending solution for the public, TD Bank also launched an initiative this year to increase the number of homeowners among black and Hispanic Americans. The Mortgage Bankers Association is also focusing on the racial gap in homeownership with loan initiatives in Memphis, Tennessee, and Columbus, Ohio.

Those in real estate have greeted Bank of America’s efforts with enthusiasm and caution.

“I love this program,” says Storm Leroy, a real estate investor and advocate for black home ownership. “Of course, there are a couple of things that I have a few questions about.”

One obvious problem: the risks faced by borrowers who take on huge debts despite limited financial experience. With house prices peaking in recent months, there are fears that new owners could be under water because of their loans.

How the TD Bank program works

TD Bank is the ninth largest financial institution in the US. His TD Home Access mortgage, a 30-year loan, includes a $5,000 non-repayment lender loan and debt-to-income (DTI) flexibility and other standard underwriting requirements. Traditionally, borrowers accept lender loans as a way to help reduce the amount they will need to pay at closing, with the trade-off being a higher interest rate.

Like the new Bank of America program, TD Home Access loans are fixed-rate mortgages that do not require borrowers to pay mortgage insurance. However, loans carry slightly higher interest rates than those available to borrowers with larger down payments and stellar credit ratings. Home Access also requires a minimum 3 percent down payment; The Bank of America initiative has no down payment or closing costs.

TD Bank considered the possibility that its terms could cause some borrowers to go bankrupt, said Michael Innis-Thompson, head of lending and development at the bank. During the housing bubble from 2005 to 2007, lenders were known to lend mortgages to almost everyone.

Unlike subprimes of the past, TD’s new program includes guarantees.

“We were satisfied that we were implementing a product that does not necessarily put borrowers at risk,” says Innis-Thompson. “Unlike the previous market, we ensure that our borrowers qualify.”

The Bank of America program is for new customers only in the African American or Black and Hispanic areas of Charlotte, Dallas, Detroit, Los Angeles, and Miami. TD Bank does not require borrowers to be first-time homeowners, but similarly bases loan eligibility on the location of the home and the income of the borrower rather than race. In practice, a white, within-income buyer purchasing a home in a predominantly black or Hispanic census area may qualify for a Bank of America Community Affordable or TD Home Access loan.

This raises concerns about gentrification, the tendency for white homeowners to move into areas previously held by minorities.

“We monitor our program on a monthly basis to make sure that it is actually achieving its goals,” says Innis-Thompson.

TD Bank does not disclose how many borrowers have received loans under the program or where exactly it is available, but the bank is active in markets such as Miami and Philadelphia, where the population is predominantly black and Hispanic.

Homeownership inequality persists

TD Bank and Bank of America lending initiatives address an ongoing problem in the US housing market: the struggle of blacks and Hispanics to buy a home. While nearly three-quarters of white Americans owned their homes as of the second quarter of 2022, less than half of blacks and Hispanics were homeowners, according to the US Census Bureau.

“Households of color have historically been closed,” says Nicole Wright, vice president of US Bank.

There are many reasons for the racial gap in home ownership, including lower incomes and lower household wealth among blacks and Hispanics, and a history of discriminatory lending practices in the real estate industry. Mortgage lenders have long abandoned such overtly biased practices as redlining, but economic wounds are slow to heal. A growing body of research shows that black-owned homes today are undervalued by appraisers, and in one recent survey, nearly half of blacks and Hispanics reported missing out on homes in certain areas due to discrimination.

The Fair Housing Act has been in place for more than half a century, but has done little to close the racial gap in home ownership. Innis-Thompson says TD Bank’s program was partly inspired by the 2020 civil justice protests.

Tips before applying

For eligible homebuyers, programs from TD Bank and Bank of America can offer an attractive deal. While a number of loan programs cater to buyers with low or no down payment, they all come with higher fees, such as mortgage insurance. However, before proceeding with the application, consider the following tips:

  • Make sure you are ready. Before becoming a homeowner, take a good look at your finances. Make sure you can afford a mortgage in addition to any student loans, car payments, or other debts. Also, think about the stability of your income – with inflation putting pressure on budgets and talk of a recession getting louder, it’s crucial to really assess whether now is the best time for you to buy a home.
  • Grow your savings. Homeownership is usually a smart financial move, but it’s expensive. In addition to property taxes and homeowners insurance, you also incur maintenance, repairs, pest control, landscaping, and other ongoing expenses. If you haven’t already, transfer those savings to a high-yielding account – for now, the rates are favorable for savers.
  • Explore grant programs. Most states, some cities, and nonprofits offer down payment assistance to first-time homebuyers. Even if you are not buying a home in the area covered by the new initiatives, homebuyer assistance programs are available nationwide. Also look for grants (essentially free money).
  • Consider breaking into a house. A new name for an old strategy, housebreaking means living in a duplex or triplex. You occupy one apartment and then rent out another, and your tenants help pay the mortgage. Of course, this is not a plan to dive into without due diligence, and multi-family homes tend to be more expensive than single-family homes, so this won’t be an option for every borrower.

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