2008 again? Bank of America tests zero-down-payment mortgages for minority communities

Article content

This article was created by MoneyWise. Postmedia and MoneyWise may earn an affiliate commission through links on this page.

Article content

A major American bank has launched a new program to help first-time minority buyers finance a home purchase with no down payment or closing costs. It’s a boon to buyers at a time when rising interest rates and low home inventory have stacked the deck against them.

Article content

It’s also the latest response to longstanding criticism that banks favoured white borrowers.

Bank of America’s test plan is rolling out in Los Angeles, Calif.; Dallas, Texas; Detroit, Mich.; and Charlotte, N.C., aimed at predominantly minority neighbourhoods in those cities. It offers loans to minority buyers without the need for a down payment, closing costs or private mortgage insurance (PMI), an extra cost that’s customary for buyers who put down less than 20 per cent of the home’s purchase price.

Article content

Crucially, the program also requires no minimum credit score, with eligibility focused instead on a borrower’s solid track record of rent payments and regular monthly bills like utilities and phone. Before applying, buyers must finish a homebuyer certification course that counsels them on ownership responsibilities and other considerations.

But the move quickly drew mixed responses online, as Bank of America (and other large lenders) have been criticized in the past for predatory lending practices — especially when loaning to minority groups.

Don’t miss

No money down loans — a timely boost

Article content

For buyers in Bank of America’s test cities, the loans come at a critical time.

Rising interest rates are making mortgages more expensive and creating downward pressure on lenders to ensure their loans are as risk-averse as possible. Bank of America’s program is meant to break from this by freeing qualified applicants from down payments, credit score standards and PMI costs.

That reduces many of the barriers to entry for homeownership for buyers in communities fighting against institutional lending that often favours white borrowers.

“Homeownership strengthens our communities and can help individuals and families to build wealth over time,” said AJ Barkley, Bank of America’s head of neighbourhood and community lending.

Article content

Homeownership among white households in America was 72.1 per cent in 2020, according to the National Association of Realtors — compared to 51.1 per cent for Hispanic and 43.4 per cent for Black households.

And Black borrowers in the United States are denied mortgages at twice the rate of the overall borrower pool, according to a recent report from LendingTree.

Bank of America’s plan adds to its $15 billion program that offers closing-cost and down payment assistance to lower-income buyers and another initiative aimed at providing $15 billion in mortgages to low- to moderate-income buyers through mid-2027.

The equity risk

However, critics of the program were quick to point out that it could backfire and potentially harm the communities it’s designed to help.

Article content

The 2008 housing crisis — which was heavily driven by risky loans to unqualified buyers — taught tough lessons to lenders who were stuck with foreclosed homes after buyers stopped making payments on properties they were never able to afford.

The consequences were devastating: Lenders inherited foreclosed homes and buyers saw their credit scores sink.

It’s likely that at least some of the borrowers under Bank of America’s new program would be considered “subprime” under ordinary lending rules — recalling the ugliest days of the 2008 crisis and supplying critics with easy talking points. Credit agency Experian, for instance, considers borrowers with credit scores between 580 and 669 as subprime.

And while credit scores aren’t always an accurate barometer of a buyer’s purchase power or ability to make timely payments, advocates worry the interest rates required to make up for the low bar the lender is setting could set minority buyers up for failure.

Article content

Check your credit score today

If you don’t know your credit score, you can check it within minutes using a free online service.

You can access your credit information anytime, and it updates monthly so you can easily keep track of your progress.

And if your credit score isn’t where you’d like it to be, many free credit monitoring services will give you personalized tips to help you turn things around fast.

This article was created by Wise Publishing. Wise is devoted to providing information that helps readers navigate the complex landscape of personal finance. Wise only partners with brands it trusts and believes may be helpful to the reader. This article provides information only and should not be construed as advice. It is provided without warranty of any kind.