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The Death of 100% Zero Down Home Financing

February 12th, 2008 5:58 AM

THE DEATH OF 100% ZERO DOWN FINANCING?

Minneapolis, MN: Lenders nationwide employ a variety of sophisticated risk modeling tools to help assess key factors that shape the future direction of the housing market, including housing supply, foreclosure inventory, delinquencies, employment rates, and price appreciation trends. Based on lender assessments, significant market downturns have been noted in many areas of the country.

HISTORY LESSON: For a refresher, up until the late 1990's, there really was no such things as 100% home financing EXCEPT for a VA loan. FHA 3% down was your only low down payment option, as standard loans required 5% down. The first zero down loans required excellent credit scores, and no real payment shock. If you had great credit, were successfully paying your rent, you could buy a home zero down if the mortgage payment was about equal or lower than your rent.

By 2005, Zero down 100% financing was the norm. Just about everyone could get financing. Furthermore, many loans were made to homeowners with somewhat non-traditional or "non-conforming" situations, be it a poor credit history, inability to document income, or any number of factors that do not fit within the traditional "box" for home loans. These loans are often called "Sub-Prime", or "Alt-A", meaning that they were somewhat riskier in nature than A credit, prime, or traditional loans.

WHAT'S HAPPENING TODAY: As a result of today's market, and in order to continue to provide loans for qualified borrowers, both lenders and the private mortgage insurance companies have been making dramatic changes across the board. The biggest change is what appears to be the imminent death of most 100% financing options.

Consumers looking to buy with 100% financing better get approved, pick out a home and close immediately. By March 1, 2008, these loans will be near impossible to find. New credit score requirements, and lack of availability to get mortgage insurance on anything over 95% loan-to-value will rule the land.

WHAT DOES THIS MEAN: Simply put, lenders again are demanding quality people with some skin in the game (down payment). What were the old rules (pre 1999) are back again. FHA with a gift from your parents for down payment is already very popular again. A few state and county bond programs will be available (like MHFA), but much harder to find. VA loans for Veterans still exist.

IS THIS THE END OF THE HOUSING MARKET? NO! Somehow we all managed to come up with down payment and buy homes we could afford before zero down and crazy lending helped create the boom that turned bust. Will it be difficult over the short-term, probably. But truly, the only challenge will be the time it takes for the consumer mindset to forget zero down, easy lending, and return to having good credit, with a little saving for down payment.