With home prices at record highs and down payment burdens skyrocketing, no-down payment mortgages have made a comeback.
“There is currently no other lender or non-bank mortgage company offering a 0% down purchase program nationwide,” said Alex Elezaj, chief strategy officer at United Wholesale Mortgage (UWM), which launched the no-down payment mortgage. “And we’ve already received thousands of applications in the two weeks since launch.”
However, some have raised concerns that this could lead to a repeat of the subprime mortgage crisis and defaults. The Korea Daily spoke with a Korean-American real estate and mortgage expert to learn more about the pros and cons of the program.
What is the background for the launch of a 0% down payment mortgage?
As home prices and mortgage rates have risen steeply since the pandemic, so have down payments. According to a recent report from Realtor.com, the down payment ratio increased from 10.7% of the purchase price in the first quarter of 2020 to 13.6% in the first quarter of this year.
As the proportion of down payment has increased, the financial burden for homebuyers has become more challenging, leading to the introduction of no-down payment options.
UWM’s 0% down payment mortgage program
To qualify, one of the borrowers must be a first-time homebuyer and earn 80% or less of the area median income (AMI).
Qualified homebuyers receive 97% of the home’s value as a first mortgage from a UWM lender. The remaining 3%, or up to $15,000, can be borrowed as a second mortgage. The second mortgage is interest-free but must be paid in full upon selling the home, paying off the mortgage, or refinancing.
Pros and cons
The main advantage is that you can buy a home without having to come up with tens to hundreds of thousands of dollars for a down payment.
However, the downside is that if you borrow 97% of the value of your home at a 7% mortgage interest rate, you’re looking at a hefty monthly payment. This means that you need to have a stable income and the home must be worth $500,000 or less to benefit from the program, experts say.
In Southern California, for example, a family of two with an AMI of $88,000 a year can only purchase a home with no down payment in San Bernardino and Riverside counties.
“Assuming a 30-year fixed mortgage rate of 7% and a maximum of 50% of income spent on housing costs including mortgage insurance (PMI), the price range for an affordable home is around $500,000,” said Jee Lee, director of the Shalom Center. “The price of purchasing homes should be lower to maximize the benefits of no-down.”
“In California, the median home price is over $900,000,” said Sang Hyuk Nam, CEO of SNA Financial. “You need a significant income to maintain a monthly payment on 97% of the house price. Practically, it might not be a good option.”
Another challenge is that if a homeowner loses their job or experiences a sudden financial hardship, the risk of default significantly increases, and the second mortgage can be problematic if they need to sell the house quickly to move.
Government assistance programs
Real estate experts advise first-time homebuyers to take advantage of government down payment assistance programs rather than risking 0% down mortgages.
“It’s better to take advantage of the various government down payment assistance programs, such as LIPA (Low Income Purchase Assistance) in Los Angeles, which offers $161,000 for first-time homebuyers, and CalHome in Orange County, which offers $100,000 in grants,” said Lee.
BY EUNYOUNG LEE, HOONSIK WOO [lee.eunyoung6@koreadaily.com]
