Zero Down Mortgage: 0 Down Mortgage Loans

Buying a home before the housing market crashed was fairly easy even for people with limited finances. People who could not afford the minimum down payment required for availing a mortgage loan, could still invest in a home on account of seller financing or by obtaining a piggyback loan, or by purchasing private mortgage insurance. The down payment that was required to procure a mortgage loan was generally 20-25 percent of the purchase price of the home. A greater down payment indicated the ability of the borrower to arrange for the necessary finances, thereby making him/her an ideal candidate. This in turn resulted in the borrower being able to procure a loan at a favorable rate of interest.

Zero Down Mortgage Loans and The Housing Market Crash

Piggyback Loans and Seller Financing: Seller financing, which was a popular means of buying a home, involved borrowing from the seller in addition to borrowing from the bank. Generally, seller financing was involved in case of piggyback loans. A piggyback loan was a second mortgage loan, that was obtained at the time of availing a primary mortgage, so that the total amount borrowed, and the amount of down payment, together were sufficient to buy a home. 80-10-10 , 80-15-5 and 75-15-10 were the popular piggyback loans. In case of 80-15-5 loans, the primary mortgage lender provided 80 percent of the mortgage loan, the borrower put down 5 percent, and remaining 15 percent was obtained from the second mortgage lender, who gave a loan that piggybacked on the primary mortgage. This loan was usually provided by the primary mortgage lender, or in some cases the seller. They gained in terms of high interest rates on the piggyback loan that was collateralized with the same property as the primary mortgage. The interest rate on the piggyback loan was much higher than the rate of interest that was charged on the primary mortgage. In fact, mortgage lenders even started providing 80-20-zero down mortgage loans because of the confidence of being able to recover the money that was due. The confidence stemmed from the belief that home prices always appreciated. Hence, a borrower who was unable to make the monthly mortgage payments could always refinance the loan or sell the home for a profit and repay the mortgage. Seller financing for piggyback loans was also a result of the expected appreciation in home prices that guaranteed the seller of recovering the money, in addition to the enticing high rate of interest on these loans.

Private Mortgage Insurance: Another way of obtaining a 0 down mortgage loan was by purchasing a lender paid or borrower paid private mortgage insurance (PMI), that protected the mortgage lender who extended 75 percent or more of the loan. Since these mortgage lenders provided low down payment or 0 down loans to borrowers who were unable to fund even the minimum down payment, they faced substantial risk. Hence, the borrower could avail zero down home mortgage loans only by purchasing insurance that protected the lender against the risk of default. The premium paid for private mortgage insurance was generally tax deductible and was canceled once the term of the mortgage was halved.

'0' Down Mortgage Loans in the Current Scenario

No down payment mortgage loans have been blamed for the housing bubble and the subsequent collapse of the housing market. In fact, seller backed financing has been blocked on government-backed loans since it is believed to have contributed significantly to the housing market bubble. It has become exceedingly difficult to procure a piggyback loan. At present, VA (Veterans Administration) insured loans are probably the only zero down mortgage loans that are readily available to eligible veterans. However, some people believe that the option of allowing state housing finance agencies and non-profit agencies to assist borrowers by permitting them to monetize the $8000 tax credit, and use it towards the minimum down payment that is required on FHA insured loans, will again result in borrowers owning a home by availing a mortgage, despite being unable to afford the monthly payments. The article on First Time Home buyer Tax Credit deals with the eligibility criteria for claiming the tax credit. Considering the median home prices, the 3.5 percent down payment that is required on FHA insured loans may very well be covered on account of FHA monetizing the tax credit. Hence, the concern.