No Money Down Home Mortgage
by Rachelle
Since people keep asking me if a no money down home mortgage is still possible despite my discussing it extensively in my 0 down home loans article, I thought I better approach the no money down home mortgage in its own essay.
The History of No Money Home Loans
Just like with 0 down home loans, a no money down home mortgage involves financing the entire value of the home rather than paying a down payment. While the no money down phenomenon actually derives from lenders providing wealthy investors a means to create new loans without liquidating their assets, it soon grew to the opposite end of the spectrum.
No Money Down Home Mortgage
It became a way for lenders to provide loans to individuals who couldn’t afford a down payment. Even though this meant courting more risky borrowers, lenders proceeded anyways because it appeared real estate was infallible investment. Property values appeared to soar endlessly, so even if a borrower defaulted on their loan, the bank could still resell it and make a profit (because the property value would be much greater than when the borrower go their loan).
About 25 years ago, average down payments were about 20 percent. During and even after the subprime lender crisis, the most common down payment is only about 4 percent. When real estate prices escalated during the 80s and 90s, lenders came up with more creative means to lend money to prospective first time home buyers.
A No Money Down Home Mortgage Is Hard to Find
Aside from veterans who can qualify for VA loans, it is almost impossible for home buyers to find a no money down home mortgage. When the real estate bubble burst, lenders found themselves collecting a larger and larger number of bad loans. This scarcity of no money down home mortgages has made it more difficult than ever for first time home buyers to obtain a home loan.
But just because no money down mortgage programs and no money down home mortgage lenders have disappeared doesn’t mean you can’t find low money down mortgages. FHA home loans — loans obtained with assistance from the Federal Housing Administration — and the first time home buyer tax credit may still help you obtain a mortgage with very little down. It isn’t quite the same thing as a zero down home loan, but it can still help you fulfill your dream of owning a home.
To be honest, no money down mortgage financing was always a bad idea for first time home buyers with shaky credit. It was a gamble lenders and banks made for their own profit. One could argue it was irresponsible for them to make such a gamble of peoples’ lives. Because they bet on real estate continuing to soar, they figured they would profit even off the irresponsible. Never mind the stress and loss those individuals might experience when they could no longer afford those high interest monthly payments.
The Way No Money Down Home Mortgage Loans Used to Work
In the 90s, when the no money down home loans came into prominence, lenders and banks 100 percent financing programs. By financing the entire value of the home rather than paying a portion of it up front through a down payment, buyers accepted higher interest rates, higher monthly payments and in most cases also the additional cost of private mortgage insurance (PMI).
PMI protected the lender or bank, not the borrower, and often added $50 to $100 more to your monthly payment for every $100,000 of the loan. To get around that, creative lenders devised the piggyback loan. Such a loan, often referred to as an 80-20 loan, helped the buyer avoid PMI by taking a second mortgage against the first mortgage. Basically, this second mortgage paid the 20 percent necessary on the first loan to avoid having to pay private mortgage insurance.
This also contributed to the economic collapse, because when someone defaulted on their loan, the foreclosed house and resale almost always paid off the first loan but not the second mortgage or piggyback loan.
When foreclosures and delinquencies surged in the last five years, all these creative financing methods pretty much dried up.
Be Practical About No Money Down Advertising
I still see some aggressive advertising regarding no money down home mortgage programs. Keep in mind that no matter what they promote, what they can offer to you personally can’t be known until they know your full credit and financial situation as well as the appraisal on the property you want to mortgage or refinance.
As I’ve said before on this site, I encourage people to exercise patience when they consider home buying and home loan financing. You will achieve greater peace of mind and greater financial stability over the long run if you put the time and effort into straightening and strengthening your current finances before you engage in the stress and debt of any kind of mortgage.
A no money down home mortgage isn’t a virtue as much it can be a burden. 0 down home loans contributed to the near-collapse of the world economy, so you should exercise caution and responsibility when you consider integrating one into your life.