What Happened To The No-Money-Down Mortgage?

Buying a home is considered to be in the top three major life events, next to getting married and having a child. And with all the excitement of home ownership comes a lot of nervousness and confusion, especially for the first-time buyer who has no idea what options are available, let alone which one will suit them best.

Lenders make their living by earning interest on the money they acquire from several sources, and then lend to a new homeowner. And one of the most common questions asked by the new homeowner is “Why does my lender want a down payment?”

The Purpose of a Down Payment

Putting a down payment on a home is the standard procedure in any home-buying process. But lenders don’t do it just because they can; your down payment is actually a win-win for both you and your lender.

Lending Is a Business

Lenders are in the business of making money. And the more low-risk investments they make, the higher their chances of earning more money. And so when they ask for your down payment, they’re actually asking you to help them make money. A down payment can amount to five or even six figures, which is a lot to invest. With that much money put into your intention to buy a home, the likelihood of you walking away or defaulting on your loan is very small, and lenders know this. In giving them your down payment, you are reassuring them that you will repay their loan to you, offering them the security they need to view you as a low risk.

Easier Qualification

Being able to provide a significant down payment also allows you to more easily qualify for a loan. And just as with your lender, who views you as a lower risk when you supply a down payment, the higher the amount you provide, the more easily you will be approved for your loan.

More Equity

Finally, your ability to provide a down payment will actually build your equity in your new property. And again, the higher the amount of your down payment, the more equity you will have. The higher amount of equity, the less loan interest you will pay, and the less you will need to finance.

The No-Money-Down Mortgage is No Longer a Viable Option

This type of mortgage was very popular a decade ago, but these days it is practically impossible to get approved for one.  The premise was that a lower income family could own their own home by not having to jump through the hoop of saving up for a down payment.  The loan was written as an adjustable rate mortgage (ARM), which was usually a very low interest rate for the first 3 years, but then it would balloon to up to double digit interest rates after that time period.

Consumers expected to refinance their loan after the 3 years to avoid this ballooning rate.  However, the collapse of the housing market and mortgage industry put a complete halt on any loans being written in the United States for a few years.  The end result for consumers of these no-money-down loans was that literally millions of people ended up owing way more on their home than what it was now worth, plus they were unable to refinance their ARMs because of changing rules.  Monthly mortgages became unbearable for these people, and they lost their homes.

With home prices still very much depreciated after that economic collapse a few years back, the risk has shifted to the lenders, who are not willing to take a bet on lending to customers who have no skin in the game.

There is, however a few government agencies who still entertain some applications for very low down payment mortgages, and credit unions can offer mortgages with less than the standard 10% down.  However, you can expect to have higher interest rates than consumers who borrow from private lending institutions.

Many types of mortgage calculators are available online that can help you figure out just how much you will need in order to purchase your first home. But the best calculator type is the one that will include all of the expenses associated with the purchase of your new home, including closing costs and taxes.

Guest author Rita Hampson writes on a variety of topics, including how to budget for a new home purchase. She recommends www.home-mortgage-calculator.com as a resource to help in the planning phase of purchasing a home.