FHA Alternative: Bank of America’s 3% Down Payment Mortgage Loan

Cash-strapped home buyers rejoice.

Bank of America, one of the largest mortgage lenders in the U.S. based on loan volume, recently announced it would offer a 3% down payment home loan without charging borrowers for private mortgage insurance. It’s a safe bet this product will be wildly popular with borrowers.

For many years, home buyers who wanted a mortgage loan with a down payment in the 3% range had but one option — an FHA loan. Mortgages insured by the Federal Housing Administration offer loan-to-value ratios up to 96.5%, for a out-of-pocket down payment as low as 3.5%.

But over the last couple of years, an increasing number of mortgage lenders have been offering 3% down payments on conventional (non-government-backed) home loans. We’ve written about this trend several times in the past.

Now, Bank of America appears to be jumping on the 3% bandwagon as well, according to a recent article in the Wall Street Journal.

Bank of America Offers 3% Down Payment with No PMI

Bank of America is the latest — and one of the largest — U.S. lenders that is now offering 3% down payment mortgage loans, according to a recent company announcement. The new financing product, which will be officially announced later today, allows Bank of America to compete with the FHA for home buyers seeking a lower down payment option.

But that’s not all. The Charlotte-based financial company said that their 3% down payment product will also allow home buyers to avoid private mortgage insurance (PMI). This is a noteworthy feature, because PMI is typically required on home loans that account for more than 80% of the purchase price.

Typically, when a borrower makes a down payment in the 3% range, he or she would have to pay for additional mortgage insurance that is designed to protects the lender. These insurance policies inflate the monthly payments and the total cost of the loan.

TD Bank was one of the first to offer such a product (a 3% down payment with no PMI), when it retooled its “Right Step” mortgage program back in 2014. Since then, other lenders have followed suit.

An Attractive Alternative to FHA Loans?

According to the Department of Housing and Urban Development (HUD), the smallest allowable down payment on an FHA loan is 3.5%. FHA also requires two types of mortgage insurance — there’s an upfront premium, as well as an annual premium. This is one of the biggest downsides to the program, especially since the annual premium has to be paid for the life of the loan in most cases.

The upfront mortgage insurance premium (MIP) for an FHA-insured home loan is currently 1.75% of the amount being borrowed. That’s $3,500 on a $200,000 mortgage, for example. The annual MIP for a 30-year fixed FHA loan is 0.85%.

So if Bank of America offers a 3% down payment option to home buyers, without the added cost of PMI, they will position themselves as an attractive alternative to FHA loans for cash-strapped borrowers.

According to D. Steve Boland, managing director for consumer lending at Bank of America, the company’s new loan product gives eligible borrowers a much-needed alternative to the Federal Housing Administration’s program:

“We need an alternative in the marketplace that helps creditworthy borrowers with a track record of paying debts on time,” he said. “We think there are still a lot of uncertainties out there in working with FHA.”

But not everyone will qualify for the new lending product. According to the company, borrowers must have a credit score of 680 or higher. There are size limits on the loan as well.

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