Zero-Down Mortgages Are Making a Comeback—Is This the Beginning of Another Housing Crash?

This story was originally published at BiggerPockets.com

With housing prices and mortgage rates rising, it’s becoming harder for the average person to own a home, let alone invest in a second property. One mortgage lender has introduced a 0% down program in the hopes of attracting more buyers. While some critics are worried it’s similar to the subprime mortgage crisis that led to the 2008 financial crash, others say it’s nothing new.

United Wholesale Mortgage (UWM) announced its zero-down program in May. This program allows borrowers who qualify to get a mortgage and a second loan to cover the cost of the down payment. Borrowers can get a 3% down payment assistance loan of up to $15,000. 

This second loan will not accrue interest or have a monthly payment. Instead, the loan has to be paid back in full if the home is sold, the mortgage is paid off, or the borrower refinances.

Homebuyers who want to take advantage of this program will need to be at or below 80% of the property address’s area median income or be a first-time buyer.

Is This a Repeat of the 2008 Housing Crisis?

While UWM says no other wholesale lender is offering this type of program nationally, programs have been in place for years that assist buyers with low or no down payments, such as bond programs, housing authority assistance on a local level, and veteran loans. The U.S. Department of Agriculture (USDA) also offers zero-down home loans in some rural areas, while Bank of America launched a zero-down mortgage program in 2022 for some Black and Hispanic communities.

Still, only a few of these programs exist, and they have many more controls that were set in place after the financial crisis. Lenders can no longer provide 100% financing on stated income, Lindsey Harn, a real estate agent in California, told BiggerPockets. “There is oversight on the financing, which far exceeds previous efforts,” she said. “Lenders and banks are held to strict ‘ability to repay’ guidelines, which hold them accountable to ensuring that a borrower has the stability and means to meet their debt obligations.”

Josh Brotemarkle, president and general counsel at Centra Capital Partners, told BiggerPockets that the real estate boom seen during the early 2000s was partly fueled by interest-only mortgages, which, like zero-down mortgages, assume that real estate will appreciate in value. But real estate can depreciate, and people are likely to walk away if they owe more than the home is valued at.  

While zero-down mortgages can help homebuyers purchase a new home, these programs are not without risk, he added.

“The price to pay for programs that seek to curtail traditional lending practices is paid with a currency called ‘moral hazard,’” Brotemarkle explained. “Moral hazard occurs when people act in risky ways because they do not bear the full consequence of their actions. When borrowers are not at risk, they are less likely to care.”

Can Investors Benefit From Zero-Down Mortgages?

UWM’s zero-down program is aimed at homebuyers struggling to purchase a property, but that doesn’t mean investors can’t take advantage to buy a second property, provided they meet the requirements. Other zero-down programs could also be worth looking into, although their strict eligibility requirements and income requirements often mean that very few real estate investors qualify. 

A down payment is one of the biggest barriers to real estate investing, and these loan products can help a lot of people build their wealth, Nicholas Ritacco, portfolio manager and director at IB Global, told BiggerPockets. “If investors can find options that work for them, I believe they have to do so with the right plan,” he added.

Still, many real estate experts say a zero-down mortgage might not make investment sense, as not putting any money down means you are starting out with little equity. One of the biggest risks is that these programs offer very high loan-to-value loans and are essentially all debt, said Ritacco. It also doesn’t allow investors to refinance with an option to cash out.

Harn agreed, as zero-down programs “are too restrictive in rate to make sense as a business model.”

“A sufficient down payment and reserves should be used to ensure a property can adequately cover its debt service,” she added.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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