SAN FRANCISCO — Renewing a 100-year old commitment to provide affordable housing, Bank of America has launched its Neighborhood Advantage Zero Down program for those who have good credit, low income and not enough money for a down payment or up-front costs.

The program also is aimed at home shoppers from any income bracket who are buying or refinancing a home in low-income neighborhoods.

But some financial advisers say the lack of a down payment may mean a higher interest rate and monthly payment.

“There are tons of programs out there that will ask for a small down payment but the advantage is you get a lower interest rate (with other programs),” said Gary Altman, president of Capital Mortgage Services in Atlanta. “An educated shopper would need to see through not having to pay any money down and ask hard questions about the overall, long term costs.”

BankAmerica Mortgage, BofA’s residential mortgage lending group has earmarked $500 million in financing in 22 states and the District of Columbia.

“We’ve made a significant dollar commitment because this is a good customer segment the bank wants to serve,” said Stephanie Smith, national manager of community lending at BankAmerica Mortgage. “Since BofA’s start, we’ve had a strong commitment to meeting homeownership needs regardless of income, race or neighborhood location and this program is an extension of that innovation.”

Low income areas targeted

To qualify, one must have an annual income that is 80 percent below the income median for the Metropolitan Statistical Area where the home is located. If buying or refinancing in a low-income census tract, the buyer’s income can exceed that percentage.

The lender is working with a 30-year fixed-rate loan and the buyer can use money from a gift, grant, installment loan or from the seller to paying the closing costs. According to Smith, the interest rate will be the same as a conventional BofA loan. The terms get technical when it comes to how much the monthly payment will be.

Smith said on a $100,000 loan, the monthly payment would be about $5 more than a conventional BofA loan. The increase comes from the mortgage insurance which accounts for 33 percent of the monthly payment. Typically, it’s 30 percent.

BofA is pledging three percent of the home’s price in accordance with state insurance regulations that prohibit GE Capital Mortgage Insurance Corp, the lender’s insurance provider, from insuring loans for more than 97 percent of a home’s value.

If a down payment is less than 20 percent of the purchase price, the homeowner is required to buy mortgage insurance. Once that percentage of equity is reached, the mortgage insurance can be canceled.

“We are confident that our risk assessment technology can gauge the risk on these types of loans,” said John Lewis, vice president of communications and public relations at GE Capital. “The type of scoring we are doing can be used to expand the market and allow for more accessibility to this loan product. We couldn’t say that a year ago.”

Guidelines cap loans

The program has a maximum loan amount that varies by state. Call your lender for details.

The program is available in Washington, D.C., and selected counties in 23 states: Alaska, Arizona, California, Connecticut, Delaware, Hawaii, Idaho, Illinois, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Oregon, Pennsylvania, Texas, Virginia, Washington, West Virginia and Wisconsin.

But some lenders are warning that the program may not be for everyone, especially if borrowers have little in savings, just started a job or don’t anticipate a significant annual salary increase as the years go by.

On the other hand, the more the home buyer borrows, the greater the risk to the lender, said Altman at Capital Mortgage Services.

“The apparent risk to the lender increases because if foreclosure occurs, there’s less likelihood that the lender can recover the investment,” Altman said. “Overall, the perception of risk is much greater, if there’s a higher loan-to-value ratio. The higher the proportion of value of the house, the greater the risk.”

Watch for hidden costs

Altman warns that hidden costs may be buried in the fine print.

One needs to ask what the strings are, he said. “The program would be good for someone who is not short on cash and can easily afford the monthly payment but it may not be a good idea for those who can barely afford to pay the loan amount each month.”

He suggested other programs that require little or no down payment but carry a low interest rate.

For example, the Department of Veterans Affairs offers VA loans that enable veterans to borrow up to $144,000.

In addition, the Federal Housing Administration allows borrowers to secure loans up to 95 percent of the price of the house if the price plus closing costs are within the agency’s guidelines. While income is not a factor, in many parts of the country, few houses qualify. Check with a mortgage lender or FHA.

Some VA, FHA loans are assumable

VA and FHA mortgages sometimes can be assumed, or passed on, to a buyer. This changing of hands eliminates closing costs and often keeps the interest rate low. Keep in mind, the assuming buyer will need enough down payment to cover the amount of equity earned in the home. Also, the seller may be liable for the loan if the buyer defaults on the mortgage payments.

Lenders in many states can provide mortgages at below-market rates for first-time buyers, provided that income and home price meet certain guidelines.

The Community Reinvestment Act requires banks to loan money to home buyers whose income level is lower than normally required to qualify for a loan.

Some are applauding BofA’s efforts, which include originating more than $15 billion in home loans to low- and moderate-income households since the bank rolled out its first Neighborhood Advantage mortgage in 1990.

“It’s been a pretty aggressive effort on their part, “said Fritz Elmendorf, vice president of communications at the Consumer Bankers Association, a retail banking trade group. “They’ve been a national leader while other banks have struggled to catch up. Some are just going at it to break even. This has been a profitable business for them.”

BofA’s Smith said the program is part of a 10-year, $140 billion community lending program. Of that total, $37 billion is targeted for low- and moderate-income lending.

Income cap for major cities

BofA said the following cities show the maximum annual income amount according to the Metropolitan Statistical Area limit allowed for home purchase.

Boston $48,000
Chicago $47,600
Dallas $43,520
Honolulu $47,680
Houston $40,320
Las Vegas $37,520
Los Angeles $37,520
Minneapolis-St. Paul $48,640
Philadelphia $42,320
Phoenix $38,640
Portland $39,680
Sacramento $41,120
San Diego $40,640
San Francisco $54,880
San Jose $61,760
Seattle $47,200
Washington, D.C. $57,840

Although BofA’s program requires less cash to close, the interest rate and the monthly payment may be higher. Here’s a comparison with other loans on a $100,000 purchase price. The example assumes average closing costs. Actual costs may vary.

Neighborhood Advantage Zero Down Loan Standard 3 percent down payment-loan FHA fixed rate loan
Down payment 0 $3,000 $2,564
One-time closing costs $1,408 $1,388 $2,038
Recurring closing costs $620 $608 $617
Cash to close $2,028 $4,996 $5,219

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