New equity-building mortgage gains steam, but isn’t for everyone

by MPA03 Feb 2015
By Meghan de St. Aubin

Since the official launch of the Wealth Building Home Loan Program earlier this year, the Neighborhood Assistance Corporation of America (NACA) said it has received tremendous interest among borrowers.

Funded by Bank of America and Citi Mortgage and administered by NACA, the program is aimed at making buying a home more affordable for moderate- to lower-income borrowers. There is little to no down payment and no closing costs or fees associated with this program.

Instead of the common 30-year mortgage, buyers would have a 15-year mortgage instead with a fixed interest rate that could be almost 0%. The product also includes the option to buy down the interest at a quicker half-percent rate. Bruce Marks, NACA’s CEO, deemed the program as a game changer for the mortgage industry.

NACA paired up with American Enterprise Institute (AEI) to develop the program. The intent was to service a broad range of borrowers and to find a reliable way for them to actually build wealth instead of sinking into long-term debt. Edward Pinto and Stephen Oliner of AEI worked with Marks to offer this program in all 30 states were NACA is located.

“If you think about it, one of the big issues that working people have is that they are overwhelmed by debt. Here you have a mortgage that isn’t really about debt. It’s really about equity,” Marks said.

Grace and Armando Ong, of Southern California, lost their home during the housing crisis, and recently applied for the new mortgage program.

“For their $400,000 house, the Ongs used what would have been a 4% down payment — $16,000 — to instead buy down their rate to 0.5%,” according to a Los Angeles Times article. “In little more than three years of monthly payments, the couple will have more than 20% equity in the home, assuming the property value stays the same.”

Underwriting standards for the loan product are different from conventional lending. NACA underwrites the loans and does not look at a borrower’s credit history, instead looking at recent payment history and residual income, similar to VA loans.

However, the approval process is far from easy and so some borrowers may find it daunting and time consuming.

The application process requires full documentation of income, assets and debt. Borrowers’ income must support their desired monthly housing payment — including principal, interest, taxes, insurance and any homeowner association fees — plus their existing debt.

In the first three years of a Wealth Building Home Loan, 77% of monthly mortgage payments pay off principal, while for a 30-year loan, 68% goes to pay interest, Pinto said. The loan provides a 0.75% lower interest rate and more than 90% of the buying power of a 30-year FHA loan.

AEI told the Los Angeles Times the organization is currently in talks with about 20 institutions — lenders, insurers, investment firms, nonprofits — to make the discounted 15-year loans widely available to borrowers of all income levels.


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