After living expenses, student loans, credit cards, car payments, and all your other bills, it can be a challenge to put away any significant portion of your income for a down payment on a new home. If you happen to work in Silicon Valley making a decent salary at a tech startup, however, you may be eligible for a no-money-down mortgage loan.
Mortgage lenders are vying for those well-paid Bay area customers by offering tailored loans, guaranteed 24-hour approval, and financial-planning services along with no-money-down mortgages. Lenders are banking on the success of the tech industry and the potential for their customers to become the next millionaires and billionaires.
San Francisco Federal Credit Union is just one several lenders offering 100% financing for 30-year adjustable-rate mortgages on homes up to $2 million. Only about 60% of applicants qualify for this type of mortgage loan. Qualified applicants need to have a credit score of at least 747 and a $219,000 average income.
Even though the qualification restrictions seem to indicate buyers for these loans are “low risk,” I can’t help but be wary of some of the red flags that seem eerily similar to the irresponsible lending practices of just a decade ago. Guaranteed 24-hour approval? No money down? Adjustable rates??
It’s understandable why a buyer would find a no-money-down loan attractive. The median listing price for a home in San Francisco is $1.2 million. It’s even higher in some parts of nearby Silicon Valley, hitting $1.5 million in Cupertino, and $2 million in Palo Alto. Saving for that kind of down payment could take a while. And when you’ve just been hired at Google with a 6-figure salary, a million-dollar home may seem like an appropriate investment. Just be sure to do your research and really understand the terms of the loan before you sign the dotted line. A down payment less than 20% will usually require private mortgage insurance (PMI) tacked onto your monthly payment. And an adjustable rate may increase your monthly payment to an unaffordable level. Talk with your lender to find out how often and how much your rate can be adjusted. In general, a fixed-rate loan is a safer bet.
It’s important for lenders to consider the customer and find ways to broaden access to mortgage loans, but we also must be diligent in correcting our past mistakes. Banks are seeing the dollar signs floating around the Bay area, both in resident’s income and the real estate market, and they want to capitalize on tem both. But there are also signs that the tech industry may not remain quite so strong. Venture capital funding dropped 20% from last year, and layoffs in the tech industry nearly doubled. Even the local housing market has cooled slightly with properties sitting on the market a little longer and receiving fewer bids.
“Given what we went through in 2008, zero-down financing is suicidal for our country,” Chuck Green, CEO of mortgage brokerage Bay Area Capital Funding, told Bloomberg. “We have to learn from our mistakes.”