How Zero Down Payment Mortgages Can Impact the Housing Market
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Housing has gotten more expensive over the years. Many people bought homes during the pandemic amid record-low interest rates and a giant stimulus package that pumped more money into the system.
These catalysts have resulted in high prices that feel inaccessible for most people. Higher interest rates have helped stem inflation, but housing prices haven’t dropped by much. Home prices are still projected to increase in 2024. Rising interest rates have also increased the monthly mortgage payments by hundreds of dollars each month. If you’re looking at a more expensive property, the higher rates may have added an extra $1,000/mo to your monthly bill.
As consumers wonder if something eventually has to give, United Wholesale Mortgage recently announced a new no-down payment loan. This guide will cover the new program, how it impacts home buyers, and what type of impact it can have on the housing market.
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How does a zero-down mortgage work?
A zero-down mortgage is a financial product that lets you buy a house without spending money upfront. This technically isn’t new. Qualifying homeowners can take out VA loans and USDA loans to buy properties without putting any money down.
States and the federal government also have several down payment assistance programs. Some of these programs are second mortgages that cover the down payment, while others are grants that let qualifying individuals bypass the minimum down payment requirement.
Mortgage lenders must still conform to Fannie Mae and Freddie Mac guidelines when giving out loans. That includes a minimum 3% down payment for home buyers with good credit. United Wholesale Mortgage came up with a workaround that involves using a second loan to cover the low down payment.
How it’s different from NINJA loans
You don’t have to be a real estate investor to remember the Great Recession. That financial event resulted in many people losing their jobs and homes. While several catalysts fueled that recession, NINJA loans were one factor.
NINJA mortgage loans were given out to people with no or low income, jobs, or assets. Lenders had loose standards and didn’t always verify if a borrower could repay the loan. This oversight allowed loan officers and companies to receive more money in the short run and hit their annual bonus benchmarks. However, the strategy collapsed in the long run since many people couldn’t repay these loans.
NINJA loans started with low monthly payments and introductory mortgage rates before they became unmanageable for borrowers. These home loans also didn’t require any down payments. This last point may concern real estate investors as United Wholesale Mortgage offers zero-down payment mortgages. History doesn’t always repeat itself, but it often rhymes.
However, the United Wholesale Mortgage zero-down payment mortgage has a few distinctions. The extra funds you use to cover the down payment cannot exceed $15,000. Furthermore, interest does not accumulate on this loan. You only pay back the second mortgage when you sell your home or refinance your current mortgage.
This program is also limited to first-time home buyers who aren’t making more than 80% of the area’s median income. Real estate investors can’t capitalize on this program to build investment portfolios without making down payments. Those safeguards limit the scalability of the program.
Finally, United Wholesale Mortgage still has standard requirements, such as having a sufficient credit score and . Some mortgage lenders overlooked these critical details when giving out mortgages and focused more on short-term profits than long-term financial solvency.
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A deferral without immediate consequences
A homeowner using this program still has to repay the second loan, but interest does not accrue on it. Inflation will make the second mortgage’s balance easier to pay by the time you refinance or sell your property. Your home will also have several years to build equity through appreciation, which can exceed the second mortgage’s balance.
Homeowners still have to make standard monthly mortgage payments, but these loans don’t have any surprises. Borrowers don’t get an introductory rate or start off with interest-only payments.
This loan program should increase the amount of first-time buyers. The down payment is one of the biggest barriers to owning a home. United Wholesale Mortgage can cover the entire down payment for most low and medium-cost-of-living homes. However, a home buyer may still have to cover some of the down payment in a high cost of living area since the mortgage lender’s program caps out at a $15,000.
Higher housing prices
It’s easy to see what will happen in the short run. Housing prices will go up as more buyers enter the market. While properties in areas with higher costs of living can also benefit, this program is more geared toward areas with low and medium costs of living.
When you remove barriers, demand grows. Housing demand would soar if lenders removed credit score requirements, but it would also result in a housing crash shortly after. The United Wholesale Mortgage zero-down payment program doesn’t have the same risks as NINJA loans. Higher purchase prices will put more properties out of reach for the program, but homeowners can use other financial products like personal loans to cover the gap. Granted, those loans require monthly payments and will increase a borrower’s financial stress.
Housing costs are currently in the Fed’s crosshairs, which can result in higher interest rates. Rate hikes are the Fed’s best way to stem rising housing costs, but zero-down payment mortgages can lead to more upside.
Housing shortages can lead to further upside
Real estate investors and people who want to own their first home shouldn’t hold their hopes for a market crash, even with zero-down payment mortgages making a comeback. The main issue surrounding housing is the lack of supply.
More demand makes these homes more accessible, but as more money rushes into smaller markets, homeowners can hold their prices steady or even raise them. This dynamic puts the Federal Reserve in a tight spot, as lowering interest rates would open the floodgates and can significantly elevate housing prices.
Homebuilders aren’t building enough properties to keep up with demand, and this is especially true for higher-demand markets. While it’s much easier to find affordable homes in the middle of the country, prices and supply get much lower as you get closer to the coasts. The impact of zero-down payment mortgages becomes less significant for areas with higher living costs.
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Can people afford zero-down payment mortgages?
Affordability isn’t the issue right now. People still have to make regular monthly mortgage payments, so it’s not a big leap to go from a 3% down payment to no down payment through a second mortgage. Borrowers had zero-down options before United Wholesale Mortgage launched its program.
However, it can create issues for people who need to refinance to save money. Inflation is still persistent, and the rising costs of goods can make it more difficult to keep up with monthly mortgage payments.
A homeowner who refinances this zero-down payment mortgage will have to pay the entire balance of the second mortgage right away. This model can limit their refinancing options since not everyone has the extra cash for the surprise payment.
Furthermore, you still have to abide by a mortgage lender’s LTV ratio requirements when you refinance. Not everyone can use a cash-out refinance to cover the costs of a second mortgage, especially people who recently bought their homes.
One result of this zero-down payment mortgage is that it can incentivize people to keep their homes. Just as some people hold onto their homes to keep their low interest rates, other homeowners may keep their properties to avoid paying off the second mortgage as a lump sum.
Homeowners can also opt for HELOCs or home equity loans to tap into equity as long as they fulfill the loan-to-value ratio limit and other requirements. This part of the program can catch some people by surprise, but it won’t be as dramatic as NINJA loans.
Zero-down payment mortgages can eventually result in more 40-year mortgages
Affordability remains a key issue; zero-down payment mortgages make prices more manageable. However, this program demonstrates that mortgage lenders are doing what they can to make it more manageable for aspiring homeowners.
This trend can result in additional initiatives, such as a 40-year mortgage. This mortgage will keep you in debt for much longer than a 30-year mortgage and result in more interest accumulation. However, 40-year mortgages also come with lower monthly payments, frees up more space in people’s budgets.
These loan terms aren’t too common due to their elevated risk and the fact that Fannie Mae and Freddie Mac aren’t involved. The federal government doesn’t even back 40-year mortgage terms.
However, as housing prices rise, it can become a more available option. While it’s a long shot that the government changes eligibility requirements, these non-QM loans can become more common. It’s one path lenders can take to stir up more demand, especially as zero-down payment mortgages become more available. However, 40-year mortgages can significantly raise housing prices by making homeownership more accessible in the short run.
The advantages of zero-down payment mortgages
A zero-down payment mortgage offers several perks for home buyers. These are the main benefits.
It’s easier to buy a home
A home offers stability and makes you a part of a community. Many people want to own homes but have a difficult time with the down payment and monthly mortgage payments. Zero-down payment mortgages remove the down payment barrier and can offer a head start with the monthly mortgage payments. You can use the money you saved up for a down payment as a buffer.
Build equity
Each monthly mortgage payment builds your home equity. Homeownership gives you a path to becoming debt-free that you will never get by renting.
No interest on the second mortgage
A big weakness of NINJA loans was that lenders worked with people who couldn’t pay back the loans. When the introductory monthly payments gave way to much higher payments, many of these borrowers entered foreclosure.
These risks aren’t as prevalent for this down payment program. Furthermore, you don’t owe any interest on your second mortgage. You only pay it back when you refinance or sell your property.
The disadvantages of zero-down payment mortgage
Zero-down payment mortgages make homeownership easier to obtain, but they come with hidden and unintended consequences. These are the highlights.
Higher monthly payments
Putting no money down increases your monthly mortgage payments and the interest you pay over the loan’s duration. A 20% down payment takes more time to save up for, but putting that much money down will make your monthly mortgage payments more manageable.
It’s more difficult to refinance your loan
You may have to pay $15,000 to United Wholesale Mortgage when you refinance. That doesn’t even include closing costs. Homeowners may feel stuck with their current mortgages without reprieve for lowering their monthly payments if they need more space in their budgets.
Housing prices will go up
More demand for housing will result in higher prices. If home buyers know that borrowers are receiving a no-interest second mortgage of up to $15,000, they may increase their asking price by $15,000.
Compare rates from a network of lenders
- Low fixed mortgage rates
- Check and monitor your credit for free
- Only a few steps to your best mortgage rates
- Great deals on your mortgage
The bottom line
Zero-down payment mortgages will heat up the housing market and bring more demand. It’s a good counter to higher interest rates, but these financial products can put more homes out of people’s reach in the long run.
The United Wholesale Mortgage program is more reasonable than NINJA loans. Borrowers don’t pay interest on the second mortgage; they still have to fulfill income and credit requirements to obtain their primary mortgages. This program’s rules also prevent people from buying multiple properties without spending money.
It’s a good short-term answer to the housing crisis, but the extra demand will eventually return us to where we started. Rising housing prices can force the Fed to keep rates elevated for longer or raise the current market rate. Consider all your mortgage options before you approach a real estate agent and ensure that the monthly mortgage payment fits in your budget and aligns with your personal finance goals.
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Marc Guberti is a business freelance writer who specializes in personal finance, digital marketing, and entrepreneurship. His award-winning book "Content Marketing Secrets" teaches readers how to create, promote and optimize content for growth and revenue. Marc also hosts the "Breakthrough Success Podcast," where listeners learn how to master content marketing and get more clients.
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