For many Americans aspiring to homeownership, the hurdle of a substantial down payment can be insurmountable. However, a recent move by one of the nation’s largest mortgage lenders seeks to address this barrier with a new zero-percent down mortgage program.
United Wholesale Mortgage (UWM), led by Mat Ishbia, introduced the program just two weeks ago, offering qualified homebuyers the opportunity to bypass the traditional down payment requirement. Under this initiative, buyers can finance 97% of a home’s value with a first mortgage, with the remaining 3% (up to $15,000) provided as a second mortgage.
While the allure of eliminating upfront costs has garnered significant interest – with thousands of loans already submitted – concerns have been raised about the potential pitfalls of such a scheme.
The primary worry revolves around homeowners starting with no equity due to the absence of a down payment. Should the housing market experience a downturn, leaving homeowners underwater (owing more than the home’s value), they may face dire consequences, akin to those witnessed during the subprime mortgage crisis of 2008.
Patricia McCoy, a professor at Boston College Law School and former mortgage regulator, highlights the risk of default and foreclosure should homeowners find themselves unable to repay the second mortgage. This, she warns, could repeat the scenario where millions of homeowners faced financial ruin during the subprime crisis.
Furthermore, concerns extend to homeowners potentially being locked into high-interest mortgage rates, hindering their ability to refinance if interest rates decline.
While zero-down mortgages aren’t new – Bank of America introduced a similar program in 2022 – experts stress the importance of understanding the terms and implications fully. Anneliese Lederer of the Center for Responsible Lending emphasizes the necessity of reading the fine print and devising a plan for repaying the second mortgage.
Dennis Kelleher, CEO of Better Markets, echoes these sentiments, expressing apprehension about the long-term impact on borrowers should the housing market take an unexpected turn.
As the debate surrounding zero-down mortgages continues, it underscores the delicate balance between expanding access to homeownership and safeguarding against potential financial risks.