It’s not surprising “zero-down mortgages are making a comeback,” as CNN recently declared. After all, home prices skyrocketed during the pandemic-fueled housing boom and have continued to do so since, recently hitting their ninth all-time high within the past year—only making down payments more costly, and somewhat unrealistic for a lot of people.
Think about it like this: In March 2020, the average home value in California was more than $572,000. Today, it’s a little more than $786,000. Twenty percent is traditionally the magic number when it comes to down payments, so it would cost $114,400 for that initial value, from four years ago, and $157,200 for the latter. The state’s median household income is only $91,550, which may sound reasonable, but not so much compared to a typical down payment. Of course, you can sometimes put down 10% or 5%—in which case, a down payment would cost $78,600 or $39,300, respectively, for the average home in California today. It’s better, but still not doable for everyone. So what about a 0% down payment?
Last month, United Wholesale Mortgage, which deems itself among the nation’s largest home mortgage lender, announced its new program called, 0% Down Purchase, “aimed to help more borrowers become homeowners without an upfront down payment.” It would allow borrowers to receive a 3% down payment assistance loan up to $15,000 from UWM, which means a property’s sale price can’t exceed $500,000, so you wouldn’t be able to buy a typical home in California (although you would in other markets, including Texas.) The down payment loan comes in the form of a second lien loan. It wouldn’t accrue interest or require a monthly payment, but it would need to be paid in full by the end of the loan term, or once the first lien is paid off—so if you were to sell or refinance, too.
Essentially, a homeowner will have a second mortgage they’ll have to pay, and they’ll have substantially higher monthly payments on the first. But, they will have gained entrance to the frozen housing market.
Borrowers must be at or below 80% of the median income for the area where they want to buy, or where the property is located. Alternatively, they need to be a first-time homebuyer (or someone who hasn’t owned a home in the last three years). Buyers who are interested can’t go directly to UWM, they still need to work with a broker and loan officer. In any case, it’s not easy to break into the housing world as a first-time buyer right now, which is why zero percent down programs can seem like a good thing—and they may be. But there are some concerns.
The pros of a 0% down payment
In some cases, would-be buyers may have the financial means necessary to keep up with monthly mortgage payments (which are substantially higher the less you put down), but coughing up tens of thousands of dollars for closing can be a stretch.
“If you can sustain the monthly payment and have some sort of reserve, then it solves a bigger homeownership problem,” Cathy Lesser Mansfield, a consumer finance law professor at Case Western Reserve University, told Fortune. Mansfield’s research on the subprime mortgage crisis is widely referenced and regarded; she’s also testified before Congress about predatory mortgage lending.
In other words, 0% down payment programs might allow people who wouldn’t traditionally be able to purchase a home, break into what feels like a broken housing market. Still, they’ll need enough money each month to pay for their principal mortgage, interest, taxes, and insurance.
Homeownership is “important for wealth accumulation,” Mansfield said, and it has been for decades. “It’s important for neighborhood stability. It’s important for making sure kids stay in the same school system while they’re growing up.” Plus, these programs can help with diversity and equity for homeownership rates, she adds.
…and the cons
There are longer-term ramifications to understand, too—namely that a new homeowner wouldn’t have any equity in their home from the start if they put nothing down. With a traditional 20% down payment, a new homeowner already has a stake in their property. But a 0% down payment is the same thing as taking out a 100% mortgage, meaning the homeowner has no equity in their home.
“The risk of that position is that if the value of the home goes down, the concern is that you will get trapped in the home,” Mansfield said. “Or when you sell, or try to refinance, you’re going to, as the seller, have to bring a bunch of money to the table.”
There’s an inherent risk in a 0% down payment that a homeowner could be underwater if prices drastically fall and they need to sell, which if you’re familiar, might bring back memories of an earlier crisis. Risky lending practices, in part, fueled the subprime mortgage crisis—home prices plummeted, mortgage defaults rose, and mortgage-backed securities deteriorated. The housing bubble popped and financial institutions suffered substantial losses, catalysts for the Great Financial Crisis.
So if a homeowner needed to sell but didn’t have enough cash to make up the difference, they’d be at risk of foreclosure, for one. And that’s “exactly what happened during the subprime crisis, when millions of homeowners were underwater on their mortgage and went into default,” Patricia McCoy, a professor at Boston College Law School and a former mortgage regulator at the Consumer Financial Protection Bureau, told CNN. “It happened before and it could happen again.”
Even if a homeowner doesn’t have to sell and home values were to fall, they could owe more than what the home is worth. But UWM argues its program won’t fuel another subprime mortgage crisis.
“They just don’t know what they’re talking about,” UWM’s chief strategy officer, Alex Elezaj, told Fortune, referring to those suggesting the program could result in another subprime mortgage crisis, or simply comparing the two. “They’re just uneducated when it comes to the reality of what we’re dealing with today…great legislation, great compliance around loans. And ultimately, UWM is making that decision on that loan of whether we’re actually going to do it or not, and we’re going to do it in a safe and sound way.”
Think about how much has changed over the years, he said. “What a loan was 20 years ago, pre-financial crisis, and how it’s handled today are just night and day.” Income verification, asset verification, credit score verification are all all done differently now, Elezaj said, which is why he argues his company’s program is “a very viable and great product.”
And home prices might not fall anytime soon, let alone fall as much as they did during the Great Financial Crisis. We’re constantly reminded that this housing cycle is unlike any other. While mortgage rates have soared and sales volume declined, home prices didn’t follow their typical pattern of plummeting; they rose. Part of that has to do with 30-year mortgages and another has to do with the fact that we’re missing millions of homes.
That isn’t to say that 0% down mortgage programs are perfect or will solve all. Take UWM’s program in which homeowners have a second mortgage plus higher monthly payments on the first. And if they want to refinance or need to sell in a couple of years, it can be risky. But it might not trigger another all-too-familiar crisis if home prices continue to rise, as they have. Still, there are other, potentially more secure, options: Chase has a 3% down mortgage program, and so does Citigroup. And there’s always an FHA loan, which only requires a 3.5% down payment.
Parents are an option, too. After all, it’s a “nepo” housing market, and millennials and Gen Zers are already asking their parents or family for help with their down payment.