Zero-Down Payment Mortgages Return Amid High Housing Costs

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United Wholesale Mortgage (UWM), with billionaire Mat Ishiba at the helm, has launched a new zero-percent down mortgage program. This program allows qualified buyers to finance 97% of their home's value with a first mortgage. The remaining 3%, up to $15,000, is covered by a secondary mortgage that carries no interest but must be repaid in full when the home is sold, the mortgage is paid off, or the owner refinances.

For example, purchasing a home appraised at $300,000 would entail a $9,000 no-interest loan for the down payment. To qualify for the maximum $15,000, the house must be valued at $500,000. The down payment assistance is calculated based on the lower appraised value or the sale price, which is significant in competitive markets where buyers often pay more than the appraised value.

Who Qualifies for a Zero-Down Mortgage?

The program is open to first-time homebuyers and middle-income consumers earning up to 80% of the area's median income. Buyers need a FICO credit score of 700 or higher, while those qualifying based on the 80% income threshold need a score of at least 620.

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"UWM's 0% Down Purchase program is going to change the game this purchase season," Ishbia, president and CEO at UWM, said in a news release. "No other wholesale lender in the country offers this, meaning independent mortgage brokers now have a significant advantage with consumers and real estate agents. Thousands of borrowers are sitting on the sidelines because they don't have a down payment — this program removes that barrier."

Despite the appeal, the program still enforces standard lending criteria.

Potential homebuyers must meet other underwriting requirements, including appropriate debt-to-income ratios and the legal requirement for lenders to ensure the consumer’s ability to repay the loan.

Current Market Conditions

High mortgage rates, home prices, and interest rates have slowed home sales. Rates peaked at just over 8% in October last year, fell to the 6% range earlier this year, and rose again in May 2024.

The zero-percent down payment program aims to help potential buyers overlook the high rates by removing the hurdle of the down payment. For instance, on a 30-year fixed-rate mortgage at 6.75%, a $350,000 loan would result in a monthly fee of $2,270 for principal, interest, and mortgage insurance, excluding property taxes and homeowners insurance.

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Many consumers might find the monthly mortgage payment comparable to their current rent, but the challenge lies in saving for even a minimal down payment.

With inflation and high prices consuming more of their paychecks, saving thousands of dollars upfront can become difficult.

UWM's new program offers a solution by providing down payment assistance, easing the transition from renting to homeownership.

However, experts suggested to CNN that there are risks involved.

The main risk is that homeowners will start with no equity since they're not putting down any initial payment, which could quickly become problematic if the housing market cools down and home values decrease.

Another issue comes if homeowners need to sell quickly due to unforeseen circumstances. In that case, CNN noted they would still need to repay the second mortgage. If the home’s sale price doesn't cover the mortgage debt, the homeowner might not have enough funds to settle the remaining amount.

Patricia McCoy, a Boston College Law School professor, said that UWM's offering mirrors the subprime mortgage crisis when many homeowners found themselves underwater and defaulted on their loans.

McCoy, who previously served as a mortgage regulator at the Consumer Financial Protection Bureau (CFPB), warned that history could repeat itself if risks aren't managed properly.

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