2008 all over again? BofA just launched a test of zero down payment, zero closing cost mortgages for minority communities
A major U.S. bank has launched a new program to help minority first-time buyers finance a home purchase with no down payment or closing costs. That̵[ads1]7;s a boon for buyers at a time when rising interest rates and low home inventory have stacked the deck against them.
It is also the latest response to long-standing criticism that the banks favored white borrowers.
Bank of America’s test plan is being rolled out in Los Angeles, Dallas, Detroit and Charlotte and targeting predominantly minority neighborhoods in those cities. It offers loans to minority buyers without the need for a down payment, closing costs or private mortgage insurance (PMI), an additional cost common to buyers who put down less than 20% of the home’s purchase price.
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 complete a home buyer certification course that guides them on home ownership responsibilities and other considerations.
But the move quickly drew mixed reactions online, as Bank of America (and other major lenders) have been criticized in the past for predatory lending practices — especially when lending to minority groups.
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No money down loan – a timely boost
For buyers in Bank of America’s test cities, the loans come at a critical time.
Rising interest rates make mortgages more expensive and create downward pressure on lenders to ensure their loans are as risk-averse as possible. Bank of America’s program is intended to break from this by freeing qualified applicants from down payments, credit score standards and PMI costs.
It lowers many of the entry barriers to home ownership for buyers in communities battling institutional lending that often favors white borrowers.
“Home ownership strengthens our communities and can help individuals and families build wealth over time,” said AJ Barkley, Bank of America’s head of neighborhood and community lending.
Homeownership among white households was 72.1% in 2020, according to the National Association of Realtors — compared to 51.1% for Hispanic and 43.4% for black households.
And black borrowers are denied twice as much as 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 costs and down payment assistance to lower-income buyers and another initiative that aims to provide $15 billion in home loans 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 is designed to help.
The housing crisis of 2008 — fueled heavily by risky loans to unqualified buyers — taught tough lessons to lenders stuck with foreclosed homes after buyers stopped making payments on properties they could never afford.
The consequences were devastating: Lenders inherited foreclosed homes and buyers saw their credit scores plummet.
It’s likely that at least some of the borrowers under Bank of America’s new program will be considered “subprime” under normal lending rules — recalling the worst days of the 2008 crisis and providing critics with easy talking points. The credit bureau Experian, for example, considers borrowers with a credit score between 580 and 669 to be subprime.
And while credit scores aren’t always an accurate barometer of a buyer’s purchasing power or ability to make timely payments, advocates worry that the interest rates required to make up for the low bar the lender sets could set minority buyers up for failure.
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