Zero Percent Down… And Out
As the housing industry has crashed, many people are trying to assign blame. One of the areas getting a lot of criticism is the practice of approving zero percent down loans. A zero percent loan is a loan where a monetary deposit is not required to obtain a loan.
Prior to the financial crisis, many of these loans were being offered.
Some would say this was a great opportunity and in a sense, it was. After all, many people with outstanding credit were simply unable to obtain a loan due to the amount of time it would have taken them to save the 20% down payment that most 30 year fixed mortgages require.
Due to this, these credit worthy but financially tapped potential home buyers were stuck wasting their money on rent instead of putting those funds to a mortgage. With the advent of the zero percent loan they were finally given the opportunity to get ahead and pay towards an asset, but typically with a high fee for mortgage protection insurance.
This type of insurance was designed to cover the cost if these home buyers defaulted on their loan.
As the economy crashed, though, it wasn’t just those who used zero percent down loans that were defaulting on their mortgage payments. It was often investors who had over leveraged on commercial property purchases, relying on potentially unreliable tenants to cover the cost of their mortgage.
Many investors also took out loans with balloon payments, or interest only payments. These types of loans had a “buy now, worry about making the high payments later” and many investors got in way over their heads.
For example, with a balloon payments the monthly mortgage may have started off at a manageable rate then ballooned into a bill the buyer couldn’t afford.
Still, zero percent down was one of the areas that took a hit. One of the ways people were able to obtain a zero percent loan while still obtaining a simple, 30 year fixed mortgage was through “seller-funded down payment assistance”, when signing up for an FHA loan.
An FHA loan is a loan for first time home buyers that already offered a low down payment rate. With assistance from the seller, or DPA, it was easy to reduce the down payment to zero percent. This was how some buyers managed to get their hands on a zero percent down loan without a volatile mortgage.
As part of the Housing Recovery Act of 2008, this option for zero percent through FHA was eliminated, making a zero percent loan even harder for new buyers to obtain.
Although some may argue this is a positive step towards economic recovery, it also changes the scope of opportunity for those who are financially stable, but do not have a down payment already in the bank.
Nonetheless, the housing market will continue to ebb and flow, and creative financing opportunities still exist if you put in the work to find them.
Prior to the financial crisis, many of these loans were being offered.
Some would say this was a great opportunity and in a sense, it was. After all, many people with outstanding credit were simply unable to obtain a loan due to the amount of time it would have taken them to save the 20% down payment that most 30 year fixed mortgages require.
Due to this, these credit worthy but financially tapped potential home buyers were stuck wasting their money on rent instead of putting those funds to a mortgage. With the advent of the zero percent loan they were finally given the opportunity to get ahead and pay towards an asset, but typically with a high fee for mortgage protection insurance.
This type of insurance was designed to cover the cost if these home buyers defaulted on their loan.
As the economy crashed, though, it wasn’t just those who used zero percent down loans that were defaulting on their mortgage payments. It was often investors who had over leveraged on commercial property purchases, relying on potentially unreliable tenants to cover the cost of their mortgage.
Many investors also took out loans with balloon payments, or interest only payments. These types of loans had a “buy now, worry about making the high payments later” and many investors got in way over their heads.
For example, with a balloon payments the monthly mortgage may have started off at a manageable rate then ballooned into a bill the buyer couldn’t afford.
Still, zero percent down was one of the areas that took a hit. One of the ways people were able to obtain a zero percent loan while still obtaining a simple, 30 year fixed mortgage was through “seller-funded down payment assistance”, when signing up for an FHA loan.
An FHA loan is a loan for first time home buyers that already offered a low down payment rate. With assistance from the seller, or DPA, it was easy to reduce the down payment to zero percent. This was how some buyers managed to get their hands on a zero percent down loan without a volatile mortgage.
As part of the Housing Recovery Act of 2008, this option for zero percent through FHA was eliminated, making a zero percent loan even harder for new buyers to obtain.
Although some may argue this is a positive step towards economic recovery, it also changes the scope of opportunity for those who are financially stable, but do not have a down payment already in the bank.
Nonetheless, the housing market will continue to ebb and flow, and creative financing opportunities still exist if you put in the work to find them.