A new offer for $0-down mortgages reignites debate over risk
It doesn't take a rocket scientist to recognize that no-money-down mortgages can blow up on you.
But NASA Federal Credit Union has reignited the debate over just how risky 100% financing really is by offering those home loans in Maryland, Virginia and the District of Columbia.
Borrowers can qualify for up to $650,000 with zero down, and up to $850,000 with a modest 5% down payment, without having to buy private mortgage insurance.
You don't have to be a member of the credit union to apply for one of these home loans.
Many lenders used to finance borrowers who put up little or no cash, which helped to inflate the housing bubble of the early 2000s.
But when home prices crashed during the financial crisis and recession, those homeowners found they were seriously upside down on their loans, owing tens if not hundreds of thousands of dollars more than their homes were worth.
Many sought to do short sales (where the bank accepts less than the balance on the loan at closing) or simply stopped making the payments on their homes and let them go into foreclosure.
If they didn't put any of their hard-earned money into a down payment, they were more likely to feel they had nothing to lose except their credit if they just let the house go.
As a result, zero-down loans were added to the list of reckless lending practices that contributed to the financial crisis, hurting lenders and borrowers alike.
But big down payments didn't guarantee that borrowers would make it through the recession unscathed.
Buyers in cities such as Phoenix, Los Angeles and Miami who put 20% or 25% down lost their money when home prices plunged 30% or more and still wound up owing far more than their houses were worth.
T. Clave Goodhope is a real estate broker in Riverside, Calif., an area that has a foreclosure rate far above the national average.
In his experience, the size of a buyer's down payment has little to do with whether the person will default on a mortgage.
"Since 1971, I have made loans to borrows with LTV (loan-to-value) ratios between 70% and 102%, and the main criteria for loan performance success is creditworthiness and prudent money management and not a LTV relationship," Goodhope says.
Joe Chatham, president of Chatham Mortgage Partners in Westlake Village, Calif., believes that bringing back 100% financing could actually help the country recover from the housing crisis.
"The paradox is that we need more aggressive lending to get us out of the problems that aggressive lending got us into in the first place," he says. "Until lenders liberalize their lending standards and homes start to sell again, we are going to see the values continue to decline until home prices are affordable for the average buyer. Still not there."
Goodhope actually sees the return of 100% financing as part of the solution to overall economic woes -- not just the real estate market.
"This economy will not start healing until about 18 months after a visually vigorous real estate market begins in earnest. That cannot happen until it finally bottoms out," Goodhope says.
"That's why it's so important that qualified buyers -- the ones who will not renege on their loans -- start buying again; 100% financing to creditworthy buyers who perform as agreed could very well be a partial solution to our nation's economic woes."
That raises the question: Is 100% financing right for you, even if you can find it?
NASA Federal Credit Union is one of the few lenders offering loans with little or no down payment without having the federal government guarantee their repayment. No one returned our phone calls asking why the credit union had decided to offer them.
But loans guaranteed by the Federal Housing Administration and Department of Veterans Affairs are widely available and only require 3.5% or nothing down. (Click here to learn more about FHA loans and VA loans.)
You're probably safe taking out a mortgage for 100% of the purchase price of your home if:
- You can comfortably afford the payments and other expenses. If the reason you need 100% financing is because you never have a spare dollar you could have set aside for a down payment, you're not ready to buy a house. Home ownership is a big responsibility and comes with extra, often unexpected expenses and home maintenance costs. Your ability to make your mortgage payment is more important than the amount of money you put down. You could buy a larger house with 20% down and be in more danger of defaulting on your loan.
Our mortgage calculator will show you exactly how much you would pay based on how much you need to borrow and the interest rate you're being charged.
- You know how much the private mortgage insurance will be, and you can afford it. When you put less than 20% down, you generally have to pay for PMI, which only protects the lender, not you. PMI can run hundreds of dollars per month. You might be better off starting an aggressive savings plan to build up a down payment and avoid paying PMI.
- You're not banking on housing price increases anytime soon. When housing prices were going up rapidly, that increase in equity could cover a multitude of financial mistakes. People sometimes bought houses they didn't even like that well, expecting to flip them and make tons of cash. Nobody knows when the market will turn around or how it will perform when it does.
Buy a house you can afford and that you plan to keep for some time, regardless of the ups and downs of the marketplace, and you'll be fine -- regardless of the size of your down payment.
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