Zero-down mortgages are back. But is this a financial mistake?
This morning I heard that United Wholesale Mortgage, the nation’s largest mortgage lender, is offering essentially zero-down mortgages. It works like this: Lenders write out 97% mortgages with a 3% second mortgage, but this is the same as a zero-down mortgage. I couldn’t be happier to see this.
I say this as someone who was on the forefront of the real estate market when zero-down mortgages were all the rage in the 2000s, before the market crashed and the Great Recession made fools of us all.
If you’ve been sitting on the sidelines of the housing market because you couldn’t come up with enough cash for a down payment, this may be a financial product you’re considering. Let’s take a look at what it is and whether it will set you up for failure.
underwater mortgage problem
Buying a home with no money down has long been considered a kind of moral failure by some. After all, if you don’t put anything into your purchase, why stick it out when the going gets tough? Of course, people who say this don’t realize what a home is and what we actually put into it every day.
It’s not just a store that you rent out to someone else. It’s your home. This is where you can raise your children, where you can have game nights with friends, where you decide to go back to school or learn how to make a sword in your garage. The home you purchase is the foundation of your social stability, whether or not the closing amount is tens of thousands of dollars.
Some people argue that the problem is that if the home isn’t worth what you paid for, you’ll walk away. And yes, it is. That certainly happened before 2008. But it was a very different time, and securing a home was much easier. People also didn’t stay in it for long. According to a 2018 analysis from Realtor.com, homeowners now typically stay in their homes for about 13 years, come rain or shine (this period is likely to be longer given post-pandemic trends).
More: Find out how to choose the best mortgage lender.
Frankly, this data point alone goes against the whole idea that if your mortgage is upside down (you owe more than your property is worth) you’ll be doing boogie. This is because, just like the stock market, corrections occur over long periods of time in the housing market. You won’t be upside down forever.
The 2008 Real Estate Market Crash: Underwater Mortgage Case Study
Let’s look at the 2008 real estate market crash as a great case study in how underwater mortgages inevitably bounce back. Before the 2008 real estate crash, the highest median sale price for a home was $257,400 in the first quarter of 2007, according to data from the Federal Reserve Bank of St. Louis. This was the worst-case scenario because mortgage interest rates at the time were about the same as they are now.
By the first quarter of 2009, the same average home was worth $208,400. This is a 19% decline in asset values in just two years. It was quite surprising to all of us in the industry at the time.
But let’s take a look at what happened to that home in the first quarter of 2020, 13 years after purchase. Everything changed when the pandemic began, but the first quarter of 2020 was still business as usual, with the median home sale price at that point up nearly 28% to $329,000. Home values have increased since 2007, even though they fell significantly between those two points.
In fact, it only took the first quarter of 2013 for potentially submerged homes to become clear again. Despite the huge recession, housing market crash and everything else going on, all zero down homes regained their equity in just 6 years. wrong.
Time for the table!
period | Average Home Selling Price | Down loan 0% equity position | Changes since 2007 |
|---|---|---|---|
1st quarter 2007 | $257,400 | $0 | Not applicable |
1st quarter 2009 | $208,400 | -$49,000 | -19.0% |
1st quarter 2013 | $258,400 | $1,000 | 0.4% |
Q1 2020 | $329,000 | $71,600 | 27.8% |
Data source: Federal Reserve Bank of St. Louis.
Is a zero-down mortgage a path to financial ruin?
The re-emergence of zero-down mortgages, albeit in a slightly different form, is neither surprising nor particularly worrisome for the economy or individuals. As long as you choose a fixed-rate mortgage with payments you can afford, having assets you don’t own usually isn’t a problem during a recession. I say “generally” because there are specific reasons why you have no choice but to sell. However, these cases are rare and only affect a small percentage of the population.
If you’re looking to build a home and the only way to do so is with a zero-down mortgage, go for it. This is not a path to financial ruin. In fact, homeownership has been proven time and time again to be a path to financial security as long as it is done thoughtfully and with the intention of staying in the home for the long term.
Put another way, would you rather own a home with no equity but the freedom to do what you want and the knowledge that your payments won’t change from year to year, or would you rent it with all the rules and regulations? The uncertainty that comes with it?
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