It’s no surprise that “zero-down mortgages are back,” as CNN recently declared. After all, home prices soared during the pandemic-induced housing boom and have continued to do so ever since, most recently hitting their ninth all-time high in the past year, which has only made a down payment more costly and impractical for many. .
Think of it this way: In March 2020, the average home price in California was over $572,000. Today, it’s just over $786,000. Traditionally, 20% is the magic number for a down payment, so the initial value four years ago was $114,400 compared to $157,200. The state’s median household income is just $91,550, which may sound reasonable, but it’s not much compared to a typical down payment. Of course, sometimes you can put down 10% or 5%, in which case the average down payment on a home in California today would be $78,600 or $39,300, respectively. This is better, but still not for everyone. What about 0% down payment?
Last month, United Wholesale Mortgage, which bills itself as one of the nation’s largest home mortgage lenders, announced a new program called “0% Down Payment Buying,” “designed to help more borrowers buy without Become a homeowner with a down payment. It will allow borrowers to get a 3% down payment assistance loan from UWM for up to $15,000, which means the property can’t be more than $500,000, so you won’t be able to buy a typical home in California (although You can get it in other markets, including Texas, which doesn’t accrue interest or require monthly payments, but is required to be paid in full at the end of the loan term or after the first lien is paid off — if you’re selling. Or refinance, too.
Essentially, homeowners will be required to pay a second mortgage, and their first monthly payment will be much higher. However, they will be entering a frozen real estate market.
Borrowers’ income must be at or below 80% of the median income in the area they want to purchase or the area where the property is located. Alternatively, they need to be first-time homebuyers (or someone who has not owned a home within the past three years). Interested buyers can’t go directly to UWM, they still need to work with a broker and loan officer. Regardless, it’s not easy to get into the real estate world as a first-time homebuyer these days, which is why a zero-down payment plan seems like a good thing — and it probably is. But there are some concerns.
Advantages of 0% down payment
In some cases, potential buyers may have the financial means to make monthly mortgage payments (the smaller the down payment, the higher the mortgage amount), but paying tens of thousands of dollars to close the deal may be a stretch.
“If you can maintain your monthly payments and have some kind of reserve, it can address the larger issue of homeownership,” said Cathy Lesser Mansfield, a professor of consumer finance law at Case Western Reserve University. . wealth. Mansfield’s research on the subprime mortgage crisis is widely cited and valued; she also testified before Congress on the issue of predatory mortgage lending.
In other words, zero-down payment plans could bring people who have traditionally been unable to buy a home into what appears to be a broken real estate market. Still, they need enough money each month to cover principal, interest, taxes, and insurance.
Homeownership is “very important to wealth building,” Mansfield said, and has been for decades. “This is important for neighborhood stability. Making sure children stay in the same school system as they grow up is important. Additionally, she added, these programs can help achieve diversity and equity in homeownership.
…and disadvantages
There are some longer-term implications to understand as well – namely, if a new homeowner doesn’t make any down payment, they won’t have any equity in their home to begin with. With a traditional 20% down payment, new homeowners already have equity in their property. But 0% down is the same as a 100% mortgage, which means the homeowner has no equity in the home.
“The risk in this position is that if the value of the home drops, there’s a concern that you’re going to be stuck in the house,” Mansfield said. “Or when you sell or try to refinance, as a seller you have to come up with a bunch of money. ”
There’s an inherent risk with zero money down that if prices drop significantly, the homeowner could be so underwater that they need to sell, which might remind you of earlier crises if you’re familiar with it. Risky lending practices contributed in part to the subprime crisis – home prices plummeted, mortgage defaults rose, and mortgage-backed securities deteriorated. The real estate bubble burst and financial institutions suffered heavy losses, becoming a catalyst for the financial crisis.
So if a homeowner needs to sell but doesn’t have enough cash to make up the difference, they’re at risk of foreclosure. Patricia McCoy, a professor at Boston College Law School and former mortgage regulator at the Consumer Financial Protection Bureau, told CNN that this is “exactly what happened during the subprime crisis, when millions of homeowners Mortgages got into trouble and went into default.” . “This has happened before and it could happen again.”
Even if homeowners don’t have to sell and the value of their home drops, they may owe more than the home is worth. But UWM argued that its plan would not fuel another subprime mortgage crisis.
“They just don’t know what they’re talking about,” UWM chief strategy officer Alex Elezaj said. wealth, referring to those who suggested the program could lead to another subprime mortgage crisis, or simply compared the two. “They’re just uneducated when it comes to the reality we’re facing today… Great legislation, good compliance on the loan side. Ultimately, UWM is making a decision on this loan and whether we really want to Do it, and we’ll do it in a safe and secure way.
Think about how much has changed over the years, he said. “What loans were 20 years ago, pre-financial crisis, the way they are processed today is literally day and night.” Elezaj said income verification, asset verification, credit score verification are all done differently now, which is why he believes His company’s plan is “a very viable and great product.”
And home prices may not fall anytime soon, let alone as much as they did during the financial crisis. We are constantly reminded that this housing cycle is different from other cycles. While mortgage rates soared and sales fell, home prices didn’t follow the typical plummeting pattern; they stood up. Part of it has to do with 30-year mortgages, and part of it has to do with us losing millions of homes.
That’s not to say that 0% down mortgage programs are perfect or solve all problems. In UWM’s program, for example, a homeowner has a second mortgage with a higher monthly payment on the first. This can be risky if they want to refinance or need to sell within a few years. But if home prices continue to rise as they are now, it may not trigger another familiar crisis. There are other options that may be safer, though: Chase has a 3% down mortgage program, as does Citigroup. And FHA loans are always available, requiring only a 3.5% down payment.
Parents are also a choice. After all, this is a “nepo” housing market, and Millennials and Gen Z are already looking to their parents or family members for help with down payments.
