As crazy as it sounds, the zero down mortgage is making a comeback! How will the new zero down mortgages affect the housing market? What about your real estate investing plans?
I don’t know about you, but I remember the crash a few years after the real estate boom of 2005. Basically, as long as you could sign your name and you had a heartbeat, you could get a mortgage… with no down payment, and that didn’t en so well.
As I said, the market crashed, and… the rest is history. So, how will the new zero down mortgage work and what impact, if any will it have on the real estate and housing market in Roseburg, OR? Let’s talk about that…
The New Zero Down Mortgage
Although it sounds like a really bad idea to most of us who were actually in the real estate industry during the market crash, we’ll just have to wait and see how it all pans out. But here’s how United Wholesale Mortgage proposes their new Zero-Percent Down Mortgage Program will work.
From what I can tell, it looks like it’s a 97-3 mortgage. That means the buyer will essentially be getting two loans.
First and Second Mortgage: The lender will fund 97% of the purchase price on a first mortgage and then they’ll fund a second mortgage for the additional 3%. So the buyer will have a 97% first mortgage and a 3% second mortgage equaling 100% of the purchase price.
The Reason For Down Payments
Remember, there is a down payment in the first place to limit the risk of a buyer defaulting on the mortgage. Requiring 3% or more as a down payment involves the buyer financially. In other words, they have a little skin in the game so to speak.
Statistically, the less the down payment – the higher the risk. Think about it, it’s just easier to walk away from a mortgage that you really have no financial interest in.
So basically the riskier the loan, the more defaults you’re likely to see… especially if the market has a downturn like we experienced in 08-09.
Before 2014, the minimum down payment for Freddie Mac and Fannie Mae (the two largest single-family residential mortgage loan funders in the US) was 5%, but in December of 2014, Freddie Mac reduced the minimum down payment to 3% with their HomePossible Program.
Fannie Mae also has their version of the 3% down program called the Home Ready Mortgage Program.
Bottom Line
In my opinion… the risk the no down mortgage brings to the housing market is 100% on the residential side of real estate, primarily because of the control the government has over that market. If you invest in multi-family real estate, you probably need to be less worried.
Listed, I’m all for saving a few bucks and helping people become homeowners, it’s what I do. But the warning bells are going off for me with this new Zero Down Mortgage program. Who knows, maybe I’m just overly conservative when it comes to real estate.
How do you feel the new zero down mortgages will affect the housing industry? Is this the answer to affordability in today’s homebuyers? Is it a fake prop-up to the economy? Is it too risky?
What if the market breaks from the high peak we’re currently on and values come down? Is this going to come back to bite us like it did in 2008-2009? Or, should we stop worrying, push forward, and go for it? What are your thoughts?