0% down payment mortgages could help more first-time home buyers get into the housing market but there are warnings
It’s not surprising that “no-interest mortgages are making a comeback” as CNN notes just declared. After all, home prices skyrocketed during the pandemic-induced housing boom and have continued to do so since, recently reaching their highest level. ninth all-time high over the past year—just made paying upfront more expensive and somewhat impractical for many people.
Think of it like this: In March 2020, average home value in California it is more than 572,000 USD. Today, it costs a little more than $786,000. Traditionally, 20 percent is the magic number when it comes to down payments, so the initial value would be $114,400 four years ago and $157,200 later. gorvernment’s Average household income It’s just $91,550, which sounds reasonable but isn’t too much compared to a typical down payment. Of course, sometimes you can make a 10% or 5% down payment—in which case the down payment would cost $78,600 or $39,300, respectively, for the average California home today. It’s better, but still not doable for everyone. So what about 0% down payment?
Last month, Unified Wholesale Mortgageconsidered one of the nation’s largest home mortgage lenders, announced its new program called 0% Down Payment, “aims to help more borrowers become homeowners with no down payment.” It would allow borrowers to receive a 3% down payment assistance loan of up to $15,000 from UWM, meaning the sale price of the property could not exceed $500,000, so you would not be able to buy a home typically in California (although you won’t be able to buy a typical home in California). other markets, including Texas.) Down payment loan taken out as a second mortgage. It won’t accrue interest or require monthly payments, but it will need to be paid in full at the end of the loan term or after the first mortgage is paid off – so if you’re planning to sell or refinance.
Essentially, the homeowner will have to pay a second mortgage and they will have to pay a significantly higher monthly payment on the first mortgage. However, they will gain access to the frozen housing market.
Borrowers must be at or below 80% of the median income for the area they want to buy or where the property is located. Additionally, they need to be a first-time home buyer (or someone who has not owned a home in the last three years). Interested buyers cannot go directly to UWM, they still have to work with brokers and lenders. In any case, it’s not easy to break in housing world As a first-time buyer right now, that’s why 0% off deals can seem like a good thing—and they can be. But there are some concerns.
Advantages of 0% down payment
In some cases, those wanting to buy a home may have the financial means necessary to meet the monthly mortgage payments (which are significantly higher the lower you put down), but Having to pay tens of thousands of dollars to complete a transaction can be daunting.
“If you can maintain your monthly payment and have some reserve, that solves the larger problem of homeownership,” said Cathy Lesser Mansfield, a professor of consumer finance law at New York University said. Case Western Reserve Universityspeak Luck. Mansfield’s study about the widely referenced and concerned subprime mortgage crisis; she also testify before Congress about predatory mortgage lending.
In other words, 0% down payment programs could allow people who wouldn’t otherwise be able to afford a home to enter a broken housing market. However, they will need enough money each month to pay principal, interest, taxes and insurance.
Mansfield said homeownership is “important for wealth accumulation” and has been for decades. “What matters is the stability of the neighborhood. It is important to ensure children are in the same school system as they grow up.” Additionally, these programs can help create diversity and equity in homeownership rates, she added.
…and disadvantages
There are also long-term consequences to understand – specifically, new homeowners won’t have any equity in their home from the start if they don’t put down anything. With a traditional 20% down payment, new homeowners already have equity in their property. But a 0% down payment is similar to a 100% mortgage, meaning the homeowner has no equity in their home.
“The risk of that position is that if the value of the house drops, the concern is that you will be stuck in the house,” says Mansfield. “Or when you sell or try to refinance, as the seller, you’re going to have to bring a bunch of money to the table.”
There is an inherent risk with a 0% down payment in that homeowners could get stuck if prices plummet and they need to sell, which, if you’re familiar, may bring back memories of the previous crisis. Risky lending practices partly fueled the subprime mortgage crisis — home prices plummeted, mortgage defaults rose and mortgage-backed securities deteriorated. The The housing bubble burst and financial institutions suffered significant losses, which were the catalyst for the Great Financial Crisis.
So, if a homeowner needs to sell but doesn’t have enough cash to cover the difference, they’re at risk of foreclosure. And that “is exactly what happened during the subprime crisis, when millions of homeowners fell behind on their mortgages and defaulted,” said Patricia McCoy, a professor at Boston University Law School and former regulator mortgage at the Consumer Financial Protection Bureau, told CNN. . “It has happened before and it could happen again.”
Even if homeowners don’t have to sell and their home’s value drops, they may still owe more than the home is worth. But UWM argues that its program will not cause another subprime mortgage crisis.
“They just don’t know what they’re talking about,” UWM chief strategy officer Alex Elezaj told Luck, referring to those who say the program could lead to another subprime mortgage crisis, or simply comparing the two. “They are just uneducated when it comes to the reality of what we are facing today…great laws, great compliance on loans. And ultimately, UWM will make the decision on that loan as to whether or not we actually do it, and we will do it in a safe and sound manner.”
Think how much has changed over the years, he said. “What the loan was like 20 years ago, the financial crisis money and how to handle it today is just a matter of day and night.” Currently, income verification, asset verification, credit score verification are all done differently, Elezaj said, which is why he considers his company’s program “a product Very doable and wonderful.”
And home prices likely won’t fall anytime soon, let alone as much as they did during the Great Financial Crisis. We are constantly reminded that this housing cycle is don’t like anything else. While mortgage rates skyrocketed and sales fell, home prices did not follow the typical pattern of sharp declines; they have increased. Part of that has to do with 30-year mortgages and the other part has to do with the fact that we are lost millions of homes.
That’s not to say that 0% down payment mortgage programs are perfect or will solve everything. Consider UWM’s program where homeowners have a second mortgage plus a higher monthly payment on the first mortgage. And if they want to refinance or need to sell in the next few years, that could be risky. But it may not trigger another all-too-familiar crisis if home prices continue to rise as they are now. However, there are other, potentially safer options: Chase has a 3% down mortgage program, as well. Citigroup. And there’s always the FHA loan, which only requires a 3.5% down payment.
Parents are also an option. After all, that is “nepo” housing marketand Millennials and Gen Z have asked their parents or family for help with the down payment.
