Today, I learned from the news that United Wholesale Mortgage, which is the biggest mortgage lender in the United States, is now providing a mortgage option that requires no down payment. This is how it works: The lender offers a mortgage where you only need to pay 3% upfront, and they also provide a separate loan for the remaining 97%. This is essentially the same as a zero down mortgage. I am extremely happy to see this.
I’m speaking from personal experience as someone who was heavily involved in the real estate market during the 2000s when zero down mortgages were very popular. Unfortunately, the market crashed and the Great Recession happened, which affected everyone negatively.
If you haven’t been able to save enough money for a down payment, you might be interested in this financial product if you’re thinking about getting into the housing market. Let’s examine what it is and determine if it will lead to failure.
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The Problem With Underwater Mortgages
Some people have considered buying a home with no money down as morally wrong. If you don’t invest anything in your purchase, why would you continue with it when faced with difficulties? Some people who make this statement don’t understand the true meaning of a home and the effort you put into it every day.
When you rent out your home, it’s not just a storefront that you’re giving to someone else. It’s your actual living space. It’s the place where you can raise your children, have game night with your friends, and make decisions like going back to school or learning to forge swords in the garage. Buying a home is an important part of having stability in society, whether you have a lot of money to bring to the closing or not.
Some people argue that the problem is that if the value of your home decreases and is worth less than what you paid for it, you may choose to abandon it. Yes, that definitely happened before 2008, but it was a time when things were very different and it was much easier to secure homes. People were not staying in them for very long. According to a study conducted by Realtor.com in 2018, homeowners usually live in their homes for approximately 13 years, regardless of the weather conditions. However, this duration is likely to be longer due to the changes in housing trends after the pandemic.
The 2008 Real Estate Market Crash
Let’s examine the real estate market crash in 2008 as a good example of how mortgages that are worth more than the property they are for eventually become valuable again. The Federal Reserve Bank of St. Louis has data showing that the highest median sales price of a home before the 2008 real estate crash was $257,400 in the first quarter of 2007. Since mortgage rates were similar in the past and present, this is a good example of a worst-case scenario.
By the first quarter of 2009, the value of that same average home had decreased to $208,400, which is a 19% decrease in value over a period of two years. At the time, it was very concerning for everyone in the industry.
Also Read: Here are New Ally Bank CD Rates for June 2024
Now, let’s find out what happened to those homes 13 years after they were bought, specifically in the first quarter of 2020. Once the pandemic started, everything changed. However, during the first quarter of 2020, things were still going on as normal in terms of business. At that time, the median home sales price was $329,000, which was almost 28% higher than in 2007. This increase occurred despite the fact that home values had dropped significantly between those two points.
| Time period | Median home sale price | Equity position for 0% down loans | Change from 2007 |
|---|---|---|---|
| Q1 2007 | $257,400 | $0 | N/A |
| Q1 2009 | $208,400 | -$49,000 | -19.0% |
| Q1 2013 | $258,400 | $1,000 | 0.4% |
| Q1 2020 | $329,000 | $71,600 | 27.8% |
Is a Zero Down Mortgage a Path to Financial Ruin?
The return of zero down mortgages, although in a slightly different form, is not surprising or particularly concerning for the economy or for you personally. If you select a fixed-rate mortgage with a payment that fits your budget, the amount of equity you have during a downturn is usually not a problem. I use the word “generally” because there are specific situations where you might have no choice but to sell, but these situations are uncommon and only impact a small number of people.
If you want to find a house to turn into your home and the only way you can do that is by getting a mortgage with no down payment, then go ahead and do it. It won’t lead to financial ruin. Research has consistently demonstrated that owning a home can lead to financial stability, as long as it is approached carefully and with the intention of staying in the home for a long time.
Let me rephrase that for you. Would you prefer to own your home without any equity, but have the freedom to do what you want and the assurance that your payment will remain the same each year? Or would you rather rent, which comes with rules and uncertainty?
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