It’s no surprise that “zero-rate mortgages are coming back,” as CNN reports. recently announced. After all, home prices soared during the pandemic housing boom and have continued to rise since, recently hitting their ninth all-time high in the past year, which has only made down payments more costly and somewhat unrealistic for many people.
Think of it this way: in March 2020. average house price in California was more than $572,000. Today it’s just over $786,000. Twenty percent is traditionally the magic number when it comes to down payments, so a four-year-old original would cost $114,400 and a recent one would cost $157,200. States average family income is only $91,550, which may seem reasonable, but isn’t much compared to a typical down payment. Of course, sometimes you can put down 10% or 5% – in which case a down payment would cost $78,600 or $39,300, respectively, for the average home in California today. This is better, but still not feasible for everyone. What about 0% down payment?
Last month, United Wholesale Mortgagewhich considers itself one of the largest mortgage lenders in the country, announced its new program called 0% Down, “aims to help more borrowers become homeowners with no down payment.” This will allow borrowers to receive a 3% loan for down payment assistance of up to $15,000 from UWM, which means the sale price of the property cannot exceed $500,000, so you won’t be able to buy a typical home in California (though to other markets, including Texas.) The down payment loan comes in the form of a second-lien loan. It will not accrue interest and will not require a monthly payment, but will need to be paid in full at the end of the loan term or after the first mortgage is paid off – the same can be said for a sale or refinance.
Essentially, the homeowner will have a second mortgage to pay off, and will have significantly higher monthly payments on the first. But they will gain access to the frozen housing market.
Borrowers must have an income at or below 80% of the median income for the area where they want to buy the property or where the property is located. Alternatively, they must be a first-time homebuyer (or someone who has not owned a home in the last three years). Interested buyers cannot contact UWM directly; they will still have to work with a broker and loan officer. It’s a tough time to break into the housing world as a first-time home buyer these days anyway, so zero rebate programs may seem like a good thing – and they are. But there are some concerns.
Advantages of a 0% down payment
In some cases, potential buyers may have the financial wherewithal to meet monthly mortgage payments (which get higher the less you put down), but coughing up tens of thousands of dollars to close can be a challenge.
“If you can meet the monthly payment and have some kind of reserve, that solves the larger problem of homeownership,” Kathy Lesser Mansfield, a professor of consumer finance law at the University. Case Western Reserve Universitysaid Luck. Mansfields research the subprime mortgage crisis is widely mentioned and discussed; she too testified before Congress about predatory mortgage lending.
In other words, 0% down payment programs could allow people who traditionally couldn’t buy a home to break into a housing market that appears to be broken. However, they will need enough money each month to pay the mortgage principal, interest, taxes and insurance.
Homeownership is “important for wealth accumulation,” Mansfield said, and has been for decades. “This is important for stability in the area. This is important to keep children in the same school system as they grow up.” Additionally, these programs can help ensure homeownership rates are diverse and fair, she adds.
…and cons
There are also long-term implications to understand, which is that the new homeowner will have no equity in their home to begin with if they don’t put anything down. With a traditional 20% down payment, the new homeowner already has equity in their property. But a 0% down payment is the same as getting a 100% mortgage, meaning the homeowner has no equity in their home.
“The risk of this position is that if the value of the home drops, there is a concern that you will be trapped in the home,” Mansfield said. “Or when you sell or try to refinance, you as the seller will have to bring a ton of money to the table.”
With a 0% down payment, there is an inherent risk that the homeowner could be underwater if prices plummet and they have to sell, which, if you’re familiar, could bring back memories of an earlier crisis. Risky lending practices contributed in part to the subprime mortgage crisis: home prices plummeted, mortgage defaults rose, and mortgage-backed securities deteriorated. The housing bubble burst and financial institutions suffered significant losses, which was the catalyst for the Great Financial Crisis.
So, if a homeowner needed to sell the house but didn’t have enough money to cover the difference, they would be at risk of foreclosure in the first place. And that’s “exactly what happened during the subprime crisis, when millions of homeowners were left behind on their mortgages and defaulted,” Patricia McCoy, a professor at Boston College Law School and a former mortgage regulator at the Consumer Financial Protection Bureau, told CNN. . “This has happened before and can happen again.”
Even if the homeowner doesn’t have to sell the home and the home’s value drops, he may owe more than the home is worth. But UWM says its program will not lead to another subprime mortgage crisis.
“They just don’t know what they’re talking about,” said UWM Chief Strategy Officer Alex Elezai. Luck, referring to those who suggest that the program could lead to another subprime mortgage crisis, or simply comparing the two. “They’re just uneducated when it comes to the reality of what we’re dealing with today… great legislation, great credit enforcement. And ultimately UWM makes a decision on that loan about whether we’re actually going to do it or not, and we’re going to do it in a safe and secure way.”
Think about how much has changed over the years, he said. “What credit was 20 years ago, before the financial crisis, and how it is treated today is just night and day.” According to Elezai, income verification, asset verification, credit score verification are all done differently now, which is why he claims his company’s program is “a very viable and great product.”
And home prices may not fall anytime soon, let alone fall as much as they did during the Great Financial Crisis. We are constantly reminded that this housing cycle is unlike any other. While mortgage rates have soared and sales have fallen, home prices have not followed the typical decline; they got up. Part of this has to do with 30-year mortgages, and part of it has to do with the fact that we are millions of homes short.
This does not mean that 0% mortgage programs are perfect or will solve all problems. Take the UWM program, for example, which gives homeowners a second mortgage plus higher monthly payments on the first. And if they want to refinance or sell in a couple of years, that could be risky. But it may not trigger another familiar crisis if house prices continue to rise as they are now. However, there are other, potentially safer options: Chase has a 3 percent mortgage program, as does Citigroup. And there’s always the FHA loan, which only requires a 3.5% down payment.
Parents are also an option. After all, this is a “crazy” housing market, and millennials and Gen Zers are already turning to their parents or relatives for help with a down payment.