It’s no surprise that “no-down mortgages are making a comeback,” as CNN points out. recently declared. After all, house prices soared during the pandemic-fueled housing boom and have continued to do so ever since, recently reaching their highest level. ninth record of all time over the past year, which has only made down payments more expensive and somewhat unrealistic for many people.
Think about it like this: in March 2020, the average house value in California, was more than $572,000. Today, it’s a little over $786,000. Twenty percent is traditionally the magic number when it comes to down payments, so it would cost $114,400 for that initial value, from four years ago, and $157,200 for the latter. The states median household income only costs $91,550, which may seem reasonable, but not so much compared to a typical down payment. Of course, sometimes you can put down 10% or 5%. In this case, a down payment would cost $78,600 or $39,300, respectively, for the average home in California today. It’s better, but it’s still not feasible for everyone. So what about a 0% down payment?
Last month, United Wholesale Mortgageswhich considers itself one of the largest real estate mortgage lenders in the country, announced its new program called 0% Down Purchase, “aims to help more borrowers become homeowners with no down payment.” This would allow borrowers to receive a 3% down payment assistance loan of up to $15,000 from UWM, meaning the sale price of a property cannot exceed $500,000, you therefore wouldn’t be able to buy a typical house in California (even if you would in California). other markets, including Texas.) The down payment loan is in the form of a second lien loan. It would not accrue interest or require a monthly payment, but it would have to be paid in full before the end of the loan term, or once the first lien is paid off, so if you were to sell or refinance as well.
Essentially, a homeowner will have to pay a second mortgage and will have significantly higher monthly payments on the first. But they will now have access to the frozen real estate market.
Borrowers must have an income at or below 80% of the median income in the area where they wish to purchase or where the property is located. Alternatively, they must be a first-time home buyer (or someone who hasn’t owned a home in the last three years). Interested buyers cannot go directly to UWM, they must still work with a broker and loan officer. Anyway, it’s not easy to break into the world of housing as a first-time buyer right now, that’s why zero percent down programs may seem like a good thing – and they can be. But there are some concerns.
The advantages of a 0% deposit
In some cases, potential buyers may have the financial means to meet the monthly mortgage payments (which are higher the less you put down), but shelling out tens of thousands of dollars for closing may be overkill.
“If you can keep the monthly payment and have some sort of reserve, that will solve a bigger homeownership problem,” Cathy Lesser Mansfield, professor of consumer credit law at New York University . Case Western University Reservesaid Fortune. Mansfield research on the subprime mortgage crisis is widely cited and considered; she is too testified before Congress on predatory mortgages.
In other words, 0% down payment programs could allow people who traditionally wouldn’t be able to buy a home to enter what looks like a broken housing market. Still, they’ll need enough money each month to pay their primary mortgage, interest, taxes and insurance.
Homeownership is “important for wealth accumulation,” Mansfield said, and has been for decades. “It’s important for the stability of the neighborhood. This is important to ensure that children stay in the same school system as they grow up. Additionally, these programs can contribute to diversity and equity in homeownership rates, she adds.
…and the disadvantages
There are also longer-term consequences to understand, namely that a new owner would have no equity in their home to begin with if they didn’t bring anything in. With a traditional 20% down payment, a new owner already has an equity stake in their property. But a 0% down payment is the same as taking out a 100% mortgage, meaning the homeowner has no equity in their home.
“The risk of this position is that if the value of the house goes down, the worry is that you’re stuck in the house,” Mansfield said. “Or when you’re selling or trying to refinance, you’re going to, as a seller, have to bring a lot of money to the table.”
There is an inherent risk with a 0% down payment that a homeowner will find themselves underwater if prices drop significantly and they have to sell, which, if you know, could bring back memories of a previous crisis . Risky lending practices partly fueled the subprime mortgage crisis: house prices fell, defaults rose, and mortgage-backed securities deteriorated. THE the real estate bubble burst and financial institutions suffered substantial losses, catalysts for the Great Financial Crisis.
So if a homeowner were to sell but didn’t have enough money to make up the difference, they would run the risk of foreclosure, for example. And that’s “exactly what happened during the subprime crisis, when millions of homeowners were underwater on their mortgages and found themselves in default,” Patricia McCoy, a professor at Boston College Law School and former mortgage regulator at the Consumer Financial Protection Bureau. . “It’s happened before and it could happen again.”
Even if a homeowner doesn’t have to sell and their home value drops, they could owe more than their home is worth. But UWM says its program won’t fuel a new subprime mortgage crisis.
“They just don’t know what they’re talking about,” said Alex Elezaj, UWM’s director of strategy. Fortune, referring to those who suggest the program could lead to a new subprime mortgage crisis, or simply comparing the two. “They’re just not informed about the reality we face today…great legislation, great compliance when it comes to lending. And ultimately it’s UWM that makes the decision on this loan as to whether we’re actually going to do it or not, and we’re going to do it in a safe and sound way.
Think about how much has changed over the years, he said. “What a loan was 20 years ago, the pre-financial crisis and the way it is managed today is just day and night.” Income verification, asset verification, credit score verification are now done differently, Elezaj said, which is why he says his company’s program is “a very viable and excellent product.”
And house prices may not fall anytime soon, let alone as much as they did during the Great Financial Crisis. We are constantly reminded that this real estate cycle is not like the others. As mortgage rates have climbed and sales volume has declined, home prices have not followed their usual falling trend; they got up. This is partly due to 30-year mortgages and partly because we are millions of houses are missing.
This is not to say that 0% down mortgage programs are perfect or will solve everything. Take UWM’s program in which homeowners benefit from a second mortgage and higher monthly payments on the first. And if they want to refinance or need to sell in a few years, it can be risky. But it might not trigger another well-publicized crisis if house prices continued to rise, as they have. However, there are other, potentially safer options: Chase has a 3% down mortgage program, as does Citi Group. And there’s always an FHA loan, which only requires a 3.5% down payment.
Parents are also an option. After all, it is a “nepo” real estate marketand millennials and Gen Z are already asking their parents or family for help with their down payment.
