Low Down Payment Loans Give Homebuyers Hope, But Is It Too Risky?

A sign lashed to a wooden post at the edge of a vacant lot in the working-class town of Bloomington may arouse suspicion in those who remember the mortgage meltdown. (Douglas McCulloh)

"Buy a Home, 1% Down, Free Recorded Message," reads a sign at the edge of a vacant lot in the scrappy working-class town of Bloomington near Riverside.

It's a tempting pitch. But it sounds a little suspicious to those who remember subprime lenders and the mortgage meltdown.

Inland Southern California became something of a poster child for the housing crisis that sunk scores of homeowners, wiped out a booming construction sector, shredded city and county budgets, and contributed to a spectacular municipal bankruptcy in San Bernardino.

I called the phone number on the sign.

"Hi, this is Emily your friendly real estate professional,” chirps a pre-recorded message. “Buying a home has never been easier. Here's how it works. You put down 1 percent and your lender 2 percent toward your down payment, which puts you on your way to home ownership."


I don’t leave a message. But somehow I get a call back anyway from a broker based in L.A. who says he’s authorized to sell these new 1 percent down home loans through United Wholesale Mortgage.

It's a licensed private lender in Michigan.

When I tell him I'm just fishing for information and not looking for a new mortgage, he’s reluctant to say much more. So I pay a visit to the storefront mortgage company of veteran broker Theresa Tims in the leafy business district of Upland, about 30 minutes outside L.A.

The social media-savvy Tims has produced video explainers about 1 percent down and other loan programs on her YouTube channel.

"I specialize in these low down loan type of programs and they fit our area perfectly," Tims tells me during an interview her assistant simultaneously webcasts on Facebook.

Tims does a lot of business in the Riverside-San Bernardino area, the Inland Empire, where median home prices are still comparatively cheap: about $300,000 for a basic three- or even four-bedroom home. That's less than half the median price in neighboring Orange County.

"Right now one of the only feasible programs is the 1 percent down with equity boost," says Tims.

She has been offering 1 percent down conventional loans since late last year, when they first became available through United Wholesale Mortgage and its Detroit-based rival Quicken Loans.

Inland Southern California’s foreclosure crisis has led cities like San Bernardino to become largely a city of renters.
Inland Southern California’s foreclosure crisis has led cities like San Bernardino to become largely a city of renters. (Leslie Berestein Rojas/KPCC)

The basic arithmetic is pretty straightforward.

Say you’re buying a $400,000 house in Riverside. You put down $4,000 -- that’s the 1 percent. The lender kicks in $8,000 -- that’s the 2 percent "grant.' And that gets you to the 3 percent threshold required to qualify for federally backed mortgage insurance.

The loans are typically marketed to mid-income borrowers without a lot of cash on hand.

“It's very common for somebody to be able to come up with $4,000 or $5,000 [for a down payment]... $8,000 to $10,000 is a little bit of a push,” says Tims. “Unless they get some kind of inheritance or they've been saving since like age 13.”

Right around Christmas, Abraham Bustillos moved his wife and three kids into a 1,300-square-foot home in Riverside with one of these 1 percent down conventional loans.

“We were thinking we were going to need at least $15,000 to $20,000,” Bustillos tells me. "So to go from that to just $6,000 [down payment], we were able to move into the home."

The balance on Bustillos’ loan is around $350,000 stretched over a 30-year fixed mortgage.

“Yes, it is a little bit more than we were paying as renters,” says Bustillos, a FedEx delivery driver. "But at the same time, now we’re not just throwing the money up in the air or paying the owner’s mortgage for him. You know, money is going into us."

One advantage to these 1 percent down loans is that traditional bank lenders may require heftier minimum down payments, higher minimum incomes and flawless credit scores.

Big non-bank lenders like United Wholesale and Quicken are filling the vacuum and scooping up customers who may not have cash for the more traditional 20 percent down payment -- or maybe just have good but not golden credit scores.

United Wholesale Mortgage declined to comment for this story over concerns it might make 1 percent down loans look risky.

But housing finance expert Edward Pinto at the American Enterprise Institute in Washington, D.C., says they can be.

"Unless you have reliable house price increases, you're going to be in trouble for many years," says Pinto.

Trouble as in your monthly payments will be pretty steep and it’ll take awhile to build up equity in your property.

"Within California, the most volatile metropolitan area for housing is Riverside-San Bernardino," Pinto explains. "And so if you're buying a home in one of these areas with a very low down payment and then other risk factors are present, if anything happens like they lose their job, they have no cushion to fall back on."

Pinto says a bigger appetite for risk has led to problems for some non-bank lenders dealing in low down payment loans.

Two years ago, the U.S. Department of Justice sued both Quicken Loans and United Shore Financial Services, the parent company of United Wholesale Mortgage.

Federal prosecutors say between 2006 and 2012, the companies wrongly certified hundreds of low down payment loan applications insured through a Federal Housing Administration program (different from the 1 percent down conventional loans Quicken and United began offering last year). The government alleges that when the loans went bad, taxpayers were on the hook for millions of dollars in losses.

United settled its case last year after paying a $48 million penalty. Quicken is fighting the charges in court.

Shortly after the lawsuits were filed, then-Quicken CEO Bill Emerson told Fox Business the government actions would stifle affordable loan programs targeting mid- and low-income borrowers.

For sale signs dot neighborhoods across San Bernardino. Despite comparatively low prices, home ownership remains out of reach for many locals.
For-sale signs dot neighborhoods across San Bernardino. Despite comparatively low prices, home ownership remains out of reach for many locals. (Leslie Berestein Rojas/KPCC)

“It's absolutely driven a lot of financial institutions away from the FHA program for sure,” said Emerson. "And you know who suffers from that. It’s the American consumer, the middle class who depend on the FHA program."

Housing risk expert Ed Pinto says these days, the majority of people buying a home for the first time in the U.S. are using FHA, 1 percent down and other types of low down payment programs.

"And this group of low down payment loans is growing very rapidly,” says Pinto. “Seventy percent of all first-time homebuyers today have down payments of less than 5 percent."

Despite the potential drawbacks, these loans remain the last best option in places like San Bernardino, a city still clawing its way back from a crushing foreclosure crisis and that municipal bankruptcy. It’s also a city where home ownership remains far below the national average.

"Instead of being in a mobile home park, we said let's go and be homeowners," says Isabel Montanez.

I met her with her two young sons outside her modest two-bedroom San Bernardino home abutting a pair of auto repair shops. The single mom just purchased the home after qualifying for a low down payment FHA loan.

"I signed the documents April 5, and before June I’ll be in," she says proudly, before explaining how she plans to expand the home and move in a couple of relatives to help offset mortgage payments and other costs associated with home ownership.