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Bank of America targets minority homeownership with mortgage program



Bank of America targets minority homeownership with mortgage program

In an effort to address the stubbornly persistent racial wealth gap, one of the nation’s largest banks has launched a mortgage program aimed at first-time homebuyers in Black and Latino neighborhoods. The program’s loose qualifying standards remove some of the major barriers to homeownership — but they also could create a risk of default for borrowers with little safety net.

New no-down payment mortgage

Bank of America’s new Community Affordable Loan Solution requires no down payment requirement, no closing costs, no minimum credit score and no mortgage insurance. The program for now is limited to first-time buyers in African-American or Black and Hispanic-Latino neighborhoods in Charlotte, Dallas, Detroit, Los Angeles and Miami. A key distinction: In addition to the first-time buyer requirement, the bank will determine eligibility for the program by the borrower’s location and income, not race.

An official from a prominent organization of Black real estate brokers lauded the bank’s initiative.

“It’s going to take more than one institution to make a dent, but any positive step toward addressing what has been an ongoing issue is a step in the right direction,” says Danny Felton, a real estate broker in Miami and second vice president of the National Association of Real Estate Brokers.

In one generous feature of Bank of America’s program, borrowers aren’t subject to mortgage insurance premiums. Most low-down payment conventional loans, as well as the 3.5 percent-down FHA loan, carry mortgage insurance. Felton describes that conundrum as “the poor pay more.”

An unequal housing economy

Bank of America’s program aims to address an ongoing challenge for the U.S. housing market: Black and Hispanic Americans’ struggle to attain homeownership. While nearly three-quarters of White Americans owned their homes as of the second quarter of 2022, less than half of Black and Hispanic Americans were homeowners, according to the U.S. Census Bureau.

There are many reasons for the racial homeownership gap, including lower incomes and less household wealth among Black and Hispanic Americans, along with the real estate industry’s history of discriminatory lending practices. Mortgage lenders long ago abandoned such overtly biased practices as redlining, but the economic wounds have been slow to heal. A growing body of research suggests that homes owned by African Americans today are undervalued by appraisers, and in one recent survey, close to half of Black and Hispanic homebuyers reported missing out on homes in certain neighborhoods due to discrimination.

Borrower beware

Bank of America’s program is attractive for the borrowers who qualify. However, it also comes with something of a red flag: Compared to borrowers who clear stringent qualifying hurdles, borrowers who buy a home with no down payment, no closing costs and no minimum credit score face a much higher risk of default. To soften that risk, the bank is requiring borrowers in the program to complete a homebuyer certification course.

Even so, these new owners will buy at what might be the top of the housing market, and with no equity to cushion them against a decline in prices.

“As well-intentioned as the program may be, introducing a no-down payment program for first-time homebuyers after a major run-up in home prices could be setting up some homebuyers for failure if home prices pull back or even level out for a period of time,” says Greg McBride, Bankrate’s chief financial analyst. “Without meaningful home price appreciation, the loan balance doesn’t decline fast enough to build a sufficient equity cushion if the homeowner needs to sell within a few years.”

For most Americans, homeownership is a crucial means to wealth-building. A mortgage default or foreclosure can be devastating to that effort.

In other words, buying now is a balancing act, especially for those on the financial margins.

Felton says the bank’s homebuyer course requirement is an important safeguard, however — and while it won’t impose a minimum credit score to qualify, the bank will also check borrowers’ credit and payment histories, such as for car insurance, rent and utilities.

“It’s not a no-credit program,” says Felton. “You have to have three tradelines for at least 12 months, which is a credit history.”

Tips for eligible borrowers

For homebuyers who qualify, Bank of America’s initiative offers a compelling deal. While a number of loan programs accommodate buyers with low to no down payments, all come with higher fees for things such as mortgage insurance.

  • Make sure you’re ready. Before becoming a homeowner, take a hard look at your finances. Make sure you can afford your mortgage in addition to any student loans, car payments or other debt. Also consider the stability of your income.
  • Build up your savings. Homeownership is generally a sound financial move, but it’s expensive. In addition to property taxes and homeowners insurance, you’re also on the hook for maintenance, repairs, pest control, landscaping and other ongoing costs.
  • Look into grant programs. Most states and some cities and nonprofits offer down payment assistance for first-time homebuyers. Even if you’re not buying in a neighborhood covered by Bank of America’s new initiative, homebuyer assistance programs are available nationwide.
  • Consider house-hacking. A new name for an old strategy, house-hacking means living in a duplex or triplex. You occupy one unit and then rent the other out, and your tenants help pay the mortgage.

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What is mortgage insurance? Here’s what it is and how it works



In most cases, the process of buying a home involves taking out a mortgage loan and making a down payment. However, if your down payment is less than 20 percent of your home’s purchase price or you are taking out a particular mortgage (such as an FHA loan), you may also need to buy mortgage insurance. For lenders, these are higher-risk lending situations, so they require mortgage insurance to protect their interests.

Below, we’ll explain the basics of mortgage insurance, including what it covers and who needs it.

What is mortgage insurance?

Mortgage insurance is an insurance policy that protects the mortgage lender and is paid for by the borrower of the loan.

You might be wondering: what does mortgage insurance cover? Usually, when you purchase an insurance plan, it is to provide coverage for you. Mortgage insurance, however, provides coverage for your lender.

With mortgage insurance, the lender or titleholder is covered in case you are unable to pay back the mortgage for any reason. This can include defaulting on payments, failing to meet contractual obligations, passing away or any other number of situations that prevent the mortgage from being completely repaid.

How mortgage insurance works

Now that we’ve covered the definition of mortgage insurance, let’s answer another popular question: How does mortgage insurance work?

In general, you need to pay for mortgage insurance if you put down less than 20 percent on a home purchase. This is because you have less invested in the home upfront, so the lender has taken on more risk giving you a mortgage. How much you’ll pay depends on the type of loan you have and other factors.

Even with mortgage insurance, you are still responsible for the loan, and if you fall behind on or stop making payments, you could lose your home to foreclosure.

Types of mortgage insurance and other fees

The type of mortgage insurance that you’ll need depends on several factors, including the kind of loan that you have. Since mortgage insurance is meant to protect lenders, your lender is responsible for choosing the company that provides your mortgage insurance.

Here’s how these types of mortgage insurance differ, including when they’re paid and how much they cost.

Private mortgage insurance

PMI, or private mortgage insurance, is typically required if you’re obtaining a conventional loan with less than 20 percent down. This can include a 3-percent or 5-percent conventional loan or other type of low-down payment mortgage. Most borrowers pay PMI with their monthly mortgage payment. The cost can vary based on your credit score, loan-to-value (LTV) ratio and other factors.

Mortgage insurance premium

MIP is the mortgage insurance premium required for an FHA loan with less than 20 percent down. You’ll pay for this mortgage insurance upfront at closing, and also annually. The upfront MIP equals 1.75 percent of your mortgage, while the annual MIP ranges from 0.45 percent to 1.05 percent of your mortgage based on the amount you borrowed, LTV ratio and the length of the loan term.

USDA guarantee fee

The USDA guarantee fee is one of the costs you’ll pay to obtain a USDA loan, which is available to borrowers in designated rural areas and has no down payment requirement. The guarantee fee is paid upfront and annually, with the upfront fee equal to 1 percent of the loan and the annual fee equal to 0.35 percent.

VA funding fee

VA loans also have no down payment requirement, but are available exclusively to servicemembers, veterans and surviving spouses. While there is no mortgage insurance required for these loans, there is a funding fee that ranges from 1.4 percent to 3.6 percent of the loan, depending on whether you’re making a down payment (and the size of it, if so) and if this is your first time obtaining a VA loan. This funding fee doesn’t have to be paid in some circumstances.

How much does mortgage insurance cost?

As we’ve covered, your mortgage insurance premium will depend on your loan amount, your LTV ratio and other variables. However, the higher your down payment, the lower your mortgage insurance premium will be.

With PMI, you can expect to pay 0.58 percent to 1.86 percent of the original amount of your loan. That equates to $58 to $186 per month for every $100,000 borrowed.

If you have an FHA loan, your upfront premium is 1.75 percent of your loan amount, while your annual premium ranges between 0.45 percent and 1.05 percent. For a $200,000 loan, your upfront MIP premium would be $3,500, and your annual premium would fall between $900 and $2,000 (paid monthly with your mortgage).

USDA loans come with a 1 percent upfront guarantee fee, as well as an annual fee that’s equal to 0.35 percent of your loan amount. Using the $200,000 loan example, that would come out to $2,000 upfront and $700 annually.

For VA loans, the funding fee will range from 1.4 percent to 3.6 percent, depending on the amount of your down payment and whether or not you’ve taken out a VA loan before. That comes out to $2,800 to $7,200 for a $200,000 loan.

Benefits of mortgage insurance

While mortgage insurance primarily benefits the lender, it does serve a purpose for the borrower because it allows you to get a mortgage with limited down payment savings. Putting down 20 percent can be challenging, especially with home values on the rise, so by paying for mortgage insurance, you can still get a loan without needing a large down payment.

By choosing a mortgage that requires mortgage insurance, you can become a homeowner sooner and at a lower upfront cost. Plus, it allows you to consider homes in other neighborhoods that might not have been in your price range.

Waiting until you have a 20 percent down payment also runs the risk of missing out on favorable mortgage rates. Mortgage insurance offers the ability to get those rates now, meaning you can save on interest over time, despite borrowing more money with a smaller down payment at first.

However, there are downsides to mortgage insurance, as well, mainly that it’s an extra expense you wouldn’t otherwise have to pay, and that it can be difficult to get out of if you have an FHA loan.

How to get rid of mortgage insurance

There are downsides to mortgage insurance as well. The biggest minus is that it’s an extra expense you wouldn’t otherwise have to pay. It can also be difficult to get out of if you have an FHA loan without refinance. If you’re concerned, there are a few options to get rid of your mortgage insurance.

If you have a conventional loan, you can get rid of mortgage insurance simply by paying down your loan. Under the Homeowners Protection Act, lenders are required to cancel your mortgage insurance once your balance reaches 78 percent of the original purchase price or once you reach the halfway point of your amortization schedule (so after 15 years of a 30-year mortgage, for example).

You can also request cancellation before the automatic removal once your balance reaches 80 percent of the original value. Some lenders are receptive to this if you are in good standing with your payments.

For FHA loans, the cancelation guidelines depend on your loan origination date. However, for loans that originate after June 3, 2013, you can’t cancel your mortgage insurance until your mortgage is paid in full – unless you made a down payment of 10 percent or more. In that case, your MIP will end after 11 years.

Lastly, you can try to refinance your mortgage in order to get out of the mortgage insurance, or get your home reappraised to see if it has gained value and the LTV ratio improves. In general, these strategies can work if your home has appreciated significantly since you first took out your mortgage.

Bottom line

When you’re buying a home with a down payment under 20 percent, your lender may require mortgage insurance to protect their financial interests in case you can’t pay back your loan.

Although it may seem like just another hoop to jump through on your journey to homeownership, there are some upsides to choosing a mortgage that requires it. Notably, paying for your property with a combination of a down payment and mortgage insurance makes it easier to become a homeowner – even if you can’t afford to pay 20 percent upfront.

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What are construction loans and how do they work?



If you can’t find the right home to buy, you might be thinking about how much it will cost to build a new house or renovate the one you currently call home. The process of borrowing the money to pay for this project is different from getting a mortgage to move into an existing property. Here’s everything you need to know about getting a construction loan.

What is a construction loan?

A home construction loan is a short-term, higher-interest loan that provides the funds required to build a residential property.

Construction loans typically are one year in duration. During this time, the property must be built and a certificate of occupancy should be issued.

Construction loan statistics

  • As of the first quarter of 2022, construction loan volume totaled $92.4 billion, according to S&P Global Market Intelligence. Year-over-year, this represents an increase of 18.2 percent, the largest leap since 2016.
  • Currently, the top five construction loan lenders are (in order): Wells Fargo, Bank of America, Chase, U.S. Bank and M&T Bank, reports S&P.
  • Permits for single-family homes came in 1.1 percent higher in July 2022, at an annual rate of 1.67 million, according to the Commerce Department.
  • Builders’ confidence in the housing market remains unenthusiastic, with a National Association of Home Builders reading declining every month of 2022 so far.
  • Construction loans typically require 20 percent down, at minimum.

How do construction loans work?

  1. The borrower applies for a construction loan, submitting financials, plans and project timelines.
  2. If approved, the borrower starts drawing funds in conjunction with each phase of the project, typically only repaying interest during construction. Throughout construction, an appraiser or inspector assesses the build to authorize more funds.
  3. Once construction finishes, the borrower usually converts to the loan to a permanent mortgage, repaying both principal and interest.

Construction loans usually have variable rates that move up and down with the prime rate. Construction loan rates are typically higher than traditional mortgage loan rates. With a traditional mortgage, your home acts as collateral — if you default on your payments, the lender can seize your home. With a home construction loan, the lender doesn’t have that option, so they tend to view these loans as bigger risks.

Because construction loans are on such a short timetable and they’re dependent on the completion of the project, you need to provide the lender with a construction timeline, detailed plans and a realistic budget.

Once approved, the borrower will be put on a draft or draw schedule that follows the project’s construction stages, and will typically be expected to make only interest payments during the construction stage. Unlike personal loans that make a lump-sum payment, the lender pays out the money in stages as work on the new home progresses.

These draws tend to happen when major milestones are completed — for example, when the foundation is laid or the framing of the house begins. Borrowers are typically only obligated to repay interest on any funds drawn to date until construction is completed.

While the home is being built, the lender has an appraiser or inspector check the house during the various stages of construction. If approved by the appraiser, the lender makes additional payments to the contractor, known as draws. Expect to have between four and six inspections to monitor the progress.

Depending on the type of construction loan, the borrower might be able to convert the construction loan to a traditional mortgage once the home is built. This is known as a construction-to-permanent loan. If the loan is solely for the construction phase, the borrower might be required to get a separate mortgage designed to pay off the construction loan.

What does a construction loan cover?

Some things a construction loan can be used to cover include:

  • The cost of the land
  • Contractor labor
  • Building materials
  • Permits

While items like home furnishings generally are not covered within a construction loan, permanent fixtures like appliances and landscaping can be included.

It’s important to discuss these items with your lender, specifically what will be included in your loan-to-value calculation, according to Steve Kaminski, head of U.S. Residential Lending at TD Bank.

“Oftentimes, construction loans will include a contingency reserve to cover unexpected costs that could arise during construction, which also serves as a cushion in case the borrower decides to make any upgrades once the construction begins,” Kaminski says. “It’s not uncommon for a borrower to want to elevate their countertops or cabinets once the plans are laid out.”

Types of construction loans

Construction-to-permanent loan

With a construction-to-permanent loan, you borrow money to pay for the cost of building your home, and once the house is complete and you move in, the loan is converted to a permanent mortgage.

The benefit of the construction-to-permanent approach is that you have only one set of closing costs to pay, reducing your overall fees.

“There’s a one-time closing so you don’t pay duplicate settlement fees,” says Janet Bossi, senior vice president at OceanFirst Bank in New Jersey.

Once the construction-to-permanent shift happens, the loan becomes a traditional mortgage, typically with a loan term of 15 to 30 years. Then, you make payments that cover both interest and the principal. At that time, you can opt for a fixed-rate or adjustable-rate mortgage. Your other options include an FHA construction-to-permanent loan — with less-stringent approval standards that can be especially helpful for some borrowers — or a VA construction loan if you’re an eligible veteran.

Construction-only loan

A construction-only loan provides the funds necessary to complete the building of the home, but the borrower is responsible for either paying the loan in full at maturity (typically one year or less) or obtaining a mortgage to secure permanent financing.

The funds from these construction loans are disbursed based upon the percentage of the project completed, and the borrower is only responsible for interest payments on the money drawn.

Construction-only loans can ultimately be costlier if you will need a permanent mortgage because you complete two separate loan transactions and pay two sets of fees. Closing costs tend to equal thousands of dollars, so it helps to avoid another set.

Another consideration is that your financial situation might worsen during the construction process. If you lose your job or face some other hardship, you might not be able to qualify for a mortgage later on — and might not be able to move into your new house.

Renovation loan

If you want to upgrade an existing home rather than build one, you can compare home renovation loan options. These come in a variety of forms depending on the amount of money you’re spending on the project.

“If a homeowner is looking to spend less than $20,000, they could consider getting a personal loan or using a credit card to finance the renovation,” Kaminski says. “For renovations starting at $25,000 or so, a home equity loan or line of credit may be appropriate, if the homeowner has built up equity in their home.”

Another viable option in the current low mortgage rate environment is a cash-out refinance, whereby a homeowner would take out a new mortgage at a higher amount than their current loan and receive that overage in a lump sum.

With any of these options, the lender generally does not require disclosure of how the homeowner will use the funds. The homeowner manages the budget, the plan and the payments. With other forms of financing, the lender will evaluate the builder, review the budget and oversee the draw schedule.

Owner-builder construction loan

Owner-builder loans are construction-to-permanent or construction-only loans where the borrower also acts in the capacity of the home builder.

Most lenders won’t allow the borrower to act as their own builder because of the complexity of constructing a home and experience required to comply with building codes. Lenders that do typically only allow it if the borrower is a licensed builder by trade.

End loan

An end loan simply refers to the homeowner’s mortgage once the property is built, Kaminski explains. A construction loan is used during the building phase and is repaid once the construction is completed. A borrower will then have their regular mortgage to pay off, also known as the end loan.

“Not all lenders offer a construction-to-permanent loan, which involves a single loan closing. Some require a second closing to move into the permanent mortgage, or an end loan,” Kaminski says.

Construction loan requirements

To get a construction loan, you’ll need a good credit score, low debt-to-income ratio and a way to prove sufficient income to repay the loan.

You also need to make a down payment when you apply for the loan. The amount will depend on the lender you choose and the amount you’re trying to borrow to pay for construction.

Many lenders also want to make sure you have a plan. If you have a detailed plan, especially if it was put together by the construction company you’re going to work with, it can help lenders feel more confident you’ll be able to repay the loan.

Adding an appraisal estimating how much the finished home will be worth is also helpful. The home will serve as collateral for the loan, so lenders want to make sure the collateral will be sufficient to secure the loan.

How to get a construction loan

Getting approval for a construction loan might seem similar to the process of obtaining a mortgage, but getting approved to break ground on a brand-new home is a bit more complicated.

Steps to get a construction loan

  1. Find a licensed builder: Any lender is going to want to know that the builder in charge of the project has the expertise to complete the home. If you have friends who have built their own homes, ask for recommendations. You can also turn to the NAHB’s directory of local home builders’ associations to find contractors in your area. Just as you would compare multiple existing homes before buying one, it’s wise to compare different builders to find the combination of price and expertise that fits your needs.
  2. Get your documents together: A lender will likely ask for a contract with your builder that includes detailed pricing and plans for the project. Be sure to have references for your builder and any necessary proof of their business credentials.
  3. Get preapproved: Getting preapproved for a construction loan can provide a helpful understanding of how much you will be able to borrow for the project. This can be an important step to avoid paying for plans from an architect or drawing up blueprints for a home that you will not be able to afford.

Factors to consider about construction loans

Before you apply for a construction loan, ask yourself these key questions.

Could your project face significant timeline issues?

Talk to your contractor and discuss the timeline of building the home and if other factors could slow down the job. Keep in mind there are still bottlenecks plaguing production, which first started with pandemic supply-chain disruptions.

Do you want to simplify the borrowing experience?

Decide if you want to go through the loan process once with a construction-to-permanent loan or twice with a construction-only loan. Consider how much the closing costs and other fees of obtaining more than one loan will add to the project. When getting a construction loan, you’re not just accounting for building the house; you also need to purchase the land and figure out how to handle the total cost later, perhaps with a permanent mortgage when the home is finished. In that case, a construction-to-permanent loan can make sense in order to avoid multiple closings. If you already have a home, though, you might be able to use the proceeds to pay down the loan. In that case, a construction-only loan might be a better choice.

Do you have homeowners insurance in place?

Even though you don’t live in the home yet, your lender will likely require a prepaid homeowners insurance policy that includes builder’s risk coverage. This way, if something happens during the construction process — the halfway-built property catches on fire, or someone vandalizes it, for example — you are protected.

How to find a construction loan lender

Check with several experienced construction loan lenders to obtain details about their specific programs and procedures, and compare construction loan rates, terms and down payment requirements to ensure you’re getting the best possible deal for your situation.

“Because construction loans are more complex transactions than a standard mortgage, it is best to find a lender who specializes in construction lending and isn’t new to the process,” Bossi says.

If you have trouble finding a lender willing to work with you, check out smaller regional banks or credit unions. They might be more flexible in their underwriting if you can show that you’re a good risk, or, at the very least, have a connection they can refer you to.

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