Is Flagstar Bank Playing Low-Income Borrowers For Chumps?

Michigan based Flagstar Bank has the Internet abuzz about their plan to bring back zero-down mortgages. 

There are plenty of details about this program that Zero Hedge and Housing Wire left out of their articles.

Flagstar Bank is also throwing in money toward closing costs. The bank is gifting the 3% required down payment. They are also contributing up to $3,500 toward closing costs to qualified borrowers.

Borrowers would not have to repay the down payment or closing costs. Flagstar Bank will be giving the borrower a 1099 form to report as income to the IRS. 

The bank says they see a need in many communities to help people who lack the funds for a down payment. Flagstar is also targeting Millennials living in urban areas with student loan debt. Student loan debt payments hinder their ability to save for a down payment.

Flagstar Bank says qualified borrowers would need an annual income of $35,000 to $62,000. The sales price of the home would tend to be in the range of $80,000 to $175,000. The property must also be in a qualified county. 

Flagstar Bank is only offering this program for homes in 18 counties in Michigan. Homes that qualify must be in low-to-moderate income census tracts. 

The mortgage rate would depend on the credit score of the borrower but could range around 4% to 4.6%.

Borrowers in the Flagstar Bank program cannot currently own a home or have owned a home in the last three years. 

A borrower must prove they have income from a job or benefits. Homebuyer education is a requirement. 

What Flagstar Bank Isn’t Saying.

Flagstar is actually Offering CRA Loans Insured By FHA.

There are several things Flagstar is saying about this program. Flagstar is offering these loans under the Community Reinvestment Act. 

FHA requires a minimum of 3% down on mortgage loans. This is why Flagstar is “gifting” the down payment. What Flagstar is calling Gifting was known as Borrower Down-Payment Assistance until HUD passed regulations barred the practice in 2008. 

However, CRA Housing Agencies were still allowed to offer the down payment assistance. Flagstar’s marketing would indicate that this is a CRA loan due to the counseling requirement and the urban areas they are targeting. 

However, there is currently a huge debate at HUD over the type of program Flagstar is offering because of the high default rate.

Banks and CRAs began offering these programs in 2011. The idea was to use Ginnie Mae securities to hedge and fund their programs.

Don’t Let Flagstar Bank Play You For A Chump. Do Your Due Diligence.

Who Currently Owns The Property And Building? 

This is important. The county or a local Land Bank owns most of these properties. The county couldn’t sell these properties through mortgage or tax foreclosures. So they gave them to the local Land Bank. 

Borrowers of CRA loans get breaks on costs because the property is usually being donated by the local Land Bank. 

However, in some cases, a municipality is only leasing the land the house sits on to the borrower. The borrower would own the house but not the land it sits on. This makes the house almost impossible to sell.

Be careful! You may also get stuck with a house that was used a meth lab or crack house.

Michigan law does not require sellers to disclose this information. Sellers also do not have to disclose if someone died in the house.

When Can You Resell The Property?

CRA Loans have a residency requirement before a borrower can resell the property. Flagstar Bank may require the borrower to reside in the house for 5 years. The residency requirement varies from CRA lender to CRA Lender. You need to ask the housing counselor or someone from Flagstar.  

Factories Nearby Can Affect Air Quality.

Eligible borrowers need to be observant of what is near the neighborhood. Are there factories nearby? Is the property downwind of a factory? These are important. The last thing you need is corrosive chemicals eating the paint off your house or turning your car into a rusted out Chevy Vega. You also don’t want your kids breathing in corrosive gases coming from the nearby auto plant. 

What’s underground?

The ground your house is built on is just as important as the air you are breathing. 

The Detroit area has a 120-year history of manufacturing and for nearly 100 years dumped their toxic waste anywhere the factory owners pleased. 

The last thing you need is blue ooze bubbling up from the ground under your kids’ swingset like Love Canal.  This actually happened at a former elementary school in the Detroit suburb of Westland in 1991. 

Toxic ooze bubbling up from the ground isn’t the only issue you need to be concerned about. You also need to be concerned about your house exploding from methane gas trapped underneath the house.

See:

Its Time To Say Sayonara To Federally Funded CRA Housing Agencies