If TD Bank wants to create a flood of mortgage applications from home buyers along the East Coast, it just made a good first step. The company recently announced a new type of home loan that offers a 3% down payment without PMI.
Home buyers trying to keep their down-payment costs below 5% typically have to turn to the FHA loan program, with its 96.5% financing option. But now there’s another option for borrowers along the U.S. East Coast, and it offers some enticing features. TD Bank, which operates in Atlantic Coast states from Maine to Florida, now offers a 3% down payment with no mortgage insurance.
It’s actually a new version of an existing product the company has offered in the past. But the new version has some noteworthy features. According to a recent press release, the company’s “Right Step” mortgage program now provides up to 97% financing for a down payment of only 3%.
“With the updated program requirements, Right Step will allow borrowers to get more house for their money by eliminating the cost of private mortgage insurance from their monthly mortgage payment,” said Michael Copley, Executive Vice President, Retail Lending, TD Bank.
In 2013, the U.S. Securities and Exchange Commission (SEC) announced it was bringing charges against TD Bank for its alleged role in a “massive” Florida-based Ponzi scheme conducted by Scott Rothstein, who is now in prison. The company was later fined $52.5 million, according to reports.
A Rarity: 3% Down Payment With No Private Mortgage Insurance
Qualified borrowers can obtain a home loan through this program with a down payment of 3%, and without the added cost of private mortgage insurance (PMI). Stated differently, the borrower can have a loan-to-value (LTV) ratio of 97% with no PMI required. This is significant, because most loans with an LTV above 80% require PMI protection, which can increase the total monthly payments by $50 to $100 per month, on average.
Even the FHA program, with its enticingly low down payment of 3.5%, requires mortgage insurance. Actually, FHA borrowers have to pay two types of insurance — there’s an upfront premium, as well as an annual premium. And many borrowers will end up paying the annual premium for the life of the loan, due to a new cancellation policy introduced last year. This makes the TD Bank product even more appealing to home buyers with limited funds.
How does this company get away with a 3% down payment with no PMI, when other lenders have to charge for mortgage insurance on such products? According to a recent Wall Street Journal article, it has to do with loan retention. TD Bank keeps these loans on its books, as opposed to selling them into the secondary market where insurance would be required. So they are able to offer the 3% down option without having to tack on the extra cost of PMI.
According to the company’s website, they generate home loans “with the intention of servicing them for the life of the term,” with the exception of FHA-insured products, which are sold to investors in the secondary market.
Lenders Bending Over Backwards to Attract Borrowers
The revised TD Bank product is the latest example of how mortgage lenders are easing their standards to attract more borrowers. It’s no secret why they are doing this. Loan application volume has dropped sharply in recent months, largely due to a decline in refinancing activity.
Mortgage rates today are nearly a full percentage point (100 basis points) higher than they were at the start of last year. In 2013, the bulk of mortgage loan applications were coming from homeowners seeking to refinance at lower rates. But that stream has dried up as a result of higher interest rates. So lenders are now easing their standards to generate more purchase-loan applications from home buyers. The 3% down-payment option is a good example.
Some mortgage lenders have also lowered their credit-score cutoffs for borrowers, in order to drum up more business. In March, we reported on new data that showed lenders were allowing for lower scores, compared to a year earlier.
Disclaimer: We make no representations, claims or guarantees about the mortgage products mentioned in this story. We have no financial interest in the company mentioned herein. To learn more about the products and programs covered above, please contact the company that offers them directly.