Are Zero Down Mortgages Making a Comeback?

Initially, it sounds too good to be true. It went away after the 2008 financial crisis. Of course, there are pros and cons. Let’s get into how it works.

So, you want to buy a home but you’re not sitting on enough savings for a downpayment. (Super common, totally fine, we’ve all been there.) With this new program, you can bypass that initial down payment. Sounds great, right? Keep reading. You have to be a first time purchaser. Instead, you borrow 3% of the home’s value (up to $15,000) as an interest-free loan, and pay for 97% of the home’s value with a standard mortgage.

 (I’m guessing you are thinking interest-free! Where do I sign up?)

 There is a catch: That $15,000 won’t accrue interest, but it will need to be paid back — in full, all at once. The time it has to be paid back is when you either sell the home, pay off the mortgage or refinance. That should work out great, assuming nothing bad happens to you, or the economy and the value of your home keeps going up.

So let’s just highlight some of the ways this $15,000 loan could become an issue for you.

1. The day you close, you are instantly upside down, if home prices level out and you had to sell right away, you would owe the $15,000. This is kind of like buying a brand new car, as soon as you drive it off of the lot, it is worth less than what you paid for it. The good thing is unlike cars which will continue to depreciate, homes generally appreciate over time.

2. You don’t want to be underwater when tragedy strikes. Losing a job or falling into financial distress might prompt you to try to sell your house, which would put you on the hook to pay back the $15,000. But if the house isn’t worth what you owe, you’ll be in default. This is what happened back in 2008.

3. Even under the rosiest economic scenario, you will still have to pay back the $15,000 at some point.

It is too early to tell if this is really going to change things. However, the good thing is that mortgage requirements are much stronger than they were in 2008, which potentially provides a level of stability and security. Nevertheless, it is always advisable to thoroughly comprehend the intricacies of a zero down mortgage before making any hasty decisions. In the past, individuals who had taken out this type of loan found themselves in a predicament when they realized they didn't fully understand the implications until it was too late. To avoid such situations, it is crucial to seek a comprehensive understanding of the terms and conditions associated with a zero down mortgage. If you have any mortgage questions, just let me know. I am not the mortgage expert, but I can help put you in touch with the right person.