Zero Percent Mortgages Pitfalls

Zero down-payment mortgages and similar programs appear to have recently been gaining traction on Main Street.

Bank of America announced Aug. 30 that it is launching a trial program, called the Community Affordable Loan Solution, offering mortgages that do not require closing costs, down payments or minimum credit scores. People in predominantly Hispanic or Black neighborhoods in Charlotte, North Carolina; Dallas; Detroit; Los Angeles; and Miami that meet specific income requirements will have access to the program.

In March, TD Bank launched a similar program that includes a $5,000 lender credit that qualifying borrowers can use on home purchase closing costs or down payments. Qualifying borrowers must meet certain credit and income parameters, as well as reside in a participating market, according to the bank's press release.

JPMorgan Chase also expanded its grant program in February 2021 to offer $5,000 for closing costs and down payments to homebuyers purchasing homes in predominantly minority neighborhoods.

The most recent data from the National Association of Realtors found that there was a significant racial gap in homeownership in 2020. White households had a homeownership rate around 72.5%, while the homeownership rates for Hispanic and Black households were 51.1% and 43.4%, respectively.

IS CURRENT HOUSING MARKET SLOWDOWN SIMILAR TO 2008 CRASH?

Zero down-payment mortgages, however, have some downsides, according to Bankrate.com chief financial analyst Greg McBride.

The downsides are that the homebuyers are very dependent on further price appreciation to build a meaningful equity stake and without that, there will not be enough equity to pay the closing costs if plans change and they need to sell in the first few years.

This is the "wrong end of the real estate cycle for zero down payment mortgages."

"The risk to borrowers has grown because of the surge in home prices," McBride said. "If home prices stall, or even decline, a no down payment loan could be setting the buyer up for failure as they won't have much, if any, equity stake in the home."

That increases the likelihood of a loan default if the borrower is looking to exit the home, he said. 

The housing market has been cooling in recent months. The number of home sale cancellations reached a two-year high in July as roughly 16% of homes that went into contract that month were called off, according to a Redfin analysis. Sentiment among builders also reached a record-low since May 2020. 

MKG Enterprises Corp Third-Party Originator NMLS 1 3 7 0 3 9 4  is a diversified digital finance company focusing on serving low-income and moderate income communities while promoting equal and fair access to homeownership to first-time home buyers and existing homeowners FHA, Conventional, VA, Jumbo loans, Non Qualified Mortgage loans, DSCR.

Home equity has proven to be one of the strongest ways for families to build and pass on intergenerational wealth. Contact us at (559) 412-7248

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MKG Enterprises Corp is pleased to introduce the Down Payment Assistance program through our Wholesale channel.

The key features of this program are as follows:

• Available for FHA products
• Available in all states except New York and Puerto Rico
• Assistance amount is up to 5% of the loan amount
• Borrowers can use the assistance for the minimum required investment, closing costs, and/or prepaid items
• Provides immediate equity in the property 

Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.

Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, 1370394 Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, 1370676 or Licensed by the Department of Business Oversight under the California Finance Lenders Law, 1370676