As the real estate market continues to be strong and housing prices rise in there there has been a quiet re- emergence of 100% financing or "no money down" mortgages in the mortgage market.
Some lenders are feeling more confident in the market and believe that housing prices will continue to rise and are willing to take on the bigger risk that comes with completely financing a home for a borrower who has no "skin in the game" or no equitable interest in the property.
A down payment, which is required by most mainstream residential mortgages today, is a borrowers equity in the home at purchase. The equity builds as the mortgage is pid down and as the market value increases.
After the economic downturn of 2007 100% Financing loans disappeared from the residential lending market. The downturn proved that more often than not, borrowers who had no monetary interest or equity in their homes were more likely to walk away from their homes and thus their mortgages.
Currently, Real Estate Agents and Lenders alike are quietly marketing "no money down" options. It's inportnant to note that real estate agents are not trained to give mortgage information or advise - they are not licensed lenders.
You may be thinking "No money down sounds great! I can keep the money I have in my pocket and use it for my vacation or to buy new furniture." While 100% financed mortgages have some advantages, it is important to know the good and the bad when making a decision as big as this. Remember, your home purchase will be one of the biggest investments you make in your life but also one of the largest debts you take on.
Let's explore both sides. The best decisions are often the ones made with knowledge and wisdom on your side.
Savings - means more money in your pocket. Frees up funds to pay for closing costs, appraisal, future home repairs, etc.
Government Guaranteed: In reference to USDA (Rural development mortgage guaranteed by the Federal government) loans which the USDA will repay in the event of a default and VA (Veterans Affairs guaranteed) loans which the VA will repay in the event of default, offer 100% financing options but with less risk to the lender because of the government guarantees. Borrowers of each loan type should expect to pay some sort of funding fee, but in some cases these fees can rolled into the loan.
High Default Rates - The last economic downturn revealed that borrowers with no "skin in the game" or financial interest in their home were more likely to default, not pay or late their mortgage, and walk away from their home than those with down payments - even in cases where down payment was made and signifcant losses in property value were experienced.
Higher Monthly Payments: Interest rates, rates of PMI which are calculated as part of the monthly payment tend to be higher. Additionally, with no down payment borrowers have larger loan balances which amount higher monthly payments.
Higher Interest Rates - Down payment helps lenders to determine risk. No Money Down loan types create a higher risk for the lender, so higher interest rates are usually offered to borrowers to protect the lenders risk of default on the mortgage. There may also be points on the loan to buy down the rate which would be added into the closing costs.
Low or No Equity Building- down payments help you build equity and a financial interest in the property. Equity is the reason most people invest in home owership or other types of real estate in the first place. The Equity can be leveraged as it grows to help with other financial goals. Another important point to consider is that history has shown that a lack of financial interest in the property or "skin in the game" might make it easier for a borrower to walk away from the property when faced with economic adversity like a job loss, or a loss in property value.
Weaker Offers: No Money Down pre- qualifications and ore- approvals may not be as appealing to Sellers when compated with buyers who make offers with a down payment.
Choosing the right mortgage option is a decision that requires research, and planning. Only you, as the borrower, can determine what type of loan will work best for you, but it is important to notw that the determination should be considered carefully since the commitment to mortgage financing is usually long term - with the average buyer staying in their home for at least 7 years.