Are dangerous loans making a comeback?
As home prices were falling and the housing market was questionable, we were seeing most of our buyers making very conservative home purchases – with down payments of 5%-20%. However, in the past year, I’ve noticed more and more buyers purchase a home with little to no down payment. I’ve even seen a few buyers end up with a loan more than the purchase price of their house. Yes, even amid all the talk of a tightened mortgage market, low down payment or no down payment options are still possible through government programs such as FHA, WHEDA, VA, and USDA.
Is putting nothing down towards your home purchase a bad thing? As with anything else, it depends. In a rising market this can be a great way to get in a home and ride the market up. The thing that scares me is that many people who haven’t saved a down payment may not really be ready for home ownership.
If a person hasn’t been able to save a down payment, do they have money for other costs related to owning a home? What happens if: …the furnace goes out? …the refrigerator dies? …your plumbing springs a leak? Remember, when you are the homeowner, you are responsible for the maintenance. What happens if you lose your job? Or your life situation changes and you need to sell? You can’t just pick up and move unless you have enough equity or money to sell and cover the closing fees, taxes, and commissions.
In general, I’m not a big fan of high leverage, because it equates to risk in my mind. Sometimes I feel like I’m the only real estate person in America that thinks this way. I feel like these no money down/low down payment loan programs have gotten too easy to obtain for people who really aren’t prepared for homeownership.
So, how do you make sure you are prepared if you want to take advantage of these loan programs? Well, to be prepared you should be out of debt (credit cards, student loans and cars), have a 6 month emergency fund, and your mortgage payments should be ¼ of your take home pay or less. This should allow you enough financial security to deal with any unplanned surprises.
These low down payment loans can be very dangerous for those that buy a house when their lives are financially unstable, but they aren’t near as bad as the interest only ARMs back in 2007. A low/no down payment loan can be great options, however, for those that are financially capable to handle home ownership. In the long run, you want to make sure you have the financial capability to sell or make repairs when it becomes necessary. Please don’t buy a house if no down payment means you have no back up.