Bank of America is launching a trial program offering mortgages for first-time homeowners that do not require down payments, closing costs or minimum credit scores, the bank announced this week.
The program – called the Community Affordable Loan Solution – will be available to people in certain predominantly Black and Hispanic neighborhoods in Charlotte, Dallas, Detroit, Los Angeles and Miami.
Applicants do not need to be Black or Hispanic in order to qualify for the program. It is unclear what the planned size of the program is.
There are no limits on the number of loans involved in the program; any property must be located in census tracts that are more than 50% African American or Hispanic, the bank said.
"Homeownership strengthens our communities and can help individuals and families to build wealth over time," AJ Barkley, head of neighborhood and community lending for Bank of America, said in a statement. "Our Community Affordable Loan Solution will help make the dream of sustained homeownership attainable for more Black and Hispanic families, and it is part of our broader commitment to the communities that we serve."
The Charlotte-based bank will also not require mortgage insurance – an additional fee that buyers can face if they put down less than 20% of a home's purchase price – for the program. Eligibility will instead be based on factors like timely rent, utility bill, phone and auto insurance payments.
Prospective buyers must also complete a homebuyer certification course provided by Bank of America and federally approved housing counseling partners before applying for the program.
There remained a substantial racial gap in homeownership in 2020, according to the most recent data from the National Association of Realtors. For White households, the homeownership rate is around 72.1%. That compares to 51.1% for Hispanic households and 43.4% for Black households. Black homeownership was actually lower in 2020 than it was in 2010, the NAR said.
"During the pandemic, rising home prices and low housing supply have disproportionally impacted Black households more than any other race/ethnic group," the report said.
However, there are certain risks and downsides that come along with zero-down-payment mortgages. Buyers typically face higher interest rates and will ultimately pay more in the long run without issuing an interest-free down payment.
In addition, if the housing market slumps, buyers are more at risk of being "underwater" – meaning they owe more money than their home is worth.
The interest rate-sensitive housing market has started to cool noticeably in recent months as the Federal Reserve moves to tighten policy at the fastest pace in three decades. Policymakers already approved a 75-basis-point rate increase in both June and July.
The average rate for a 30-year fixed mortgage climbed to 5.66% for the week ending Sept. 1, according to recent data from mortgage lender Freddie Mac. That is significantly higher than just one year ago when rates stood at 2.87%.