Writing in The Orlando Sentinel, Caroline Glenn recently reported that zero down mortgage loans are becoming increasingly popular in the Orlando area and throughout the nation as a whole. Zero down loans are still nowhere near as common as they were prior to the crisis in the late 2000s. But, as the economy has gradually improved, lenders are becoming more open to accept the risks associated with these types of loans. In this post, we will take a quick look at the numbers and then discuss the pros and cons and various other considerations of zero down mortgage loans. Upon first glance, these loans may sound highly attractive, but when you dig deeper, you may need to stop and ponder your situation a bit more before proceeding.
A Quick Look at the Numbers
As of April 2019, zero down payment mortgage loans accounted for 3.6% of all mortgage loans nationally, and 3.5% of all mortgage loans in the Orlando area (again, this article is from an Orlando-based reporter and so this area was the focus). Although these numbers may not seem too high, both of these figures represent increases when compared with where they were in 2008 at the height of the housing crisis. In 2008, these loans hit a low of 2% nationally, and in Orlando they hit a low of 1.3%. Pre-recession, at their peak. zero down mortgage loans at one point made up an impressive 12.7% of all mortgage loans nationally (and 16.6% in Orlando).
Lenders Becoming More Open to Zero Down
These recent figures provide evidence that lenders are gradually becoming more willing to take on zero down payment loans. Obviously, these loans carry risks which aren’t typically seen with other loans. Data show that those who can’t put down some amount for a down payment – or those who choose not to do so – are less financially prepared to assume the responsibility of managing a mortgage. Plus, there are reasons to believe that those who put down zero are more likely to walk away from their obligation than those who begin the process by putting down a significant sum. If a person has very little equity built up in his or her property, and a financial setback arises, that person is probably more likely to simply forfeit the property than someone who has more skin in the game.
Simply put, there are multiple reasons for lenders to approach zero down mortgage loans with greater caution. But it appears that more lenders are becoming willing to accept these kinds of loans. In part, this reflects positive developments in the wider economy. Of course, lenders are not anywhere close to where they were pre-recession when it comes to these loans. And this is for good reason. It was not uncommon, pre-crisis, for people to take on very sizable mortgages without even substantiating their income! We may getting back to a more reasonable medium, which is more than likely a good trend to see.
Think Hard About Your Situation
The appeal of zero down payment mortgage loans is pretty clear: a buyer gets to start building equity, rather than simply paying money toward rent, right away without having to put down a large chunk of cash. For those who can make it work, zero down loans can be a great thing. Suppose you have a person who’s been a perpetual renter and would like to own a home but has little in the way of savings. A zero down payment mortgage could have a transformational kind of impact on his or her life.
The key point here, however, is that someone contemplating one of these loans needs to think very carefully about his or her entire situation before signing on the dotted line. A prospective borrower needs to think about every relevant aspect of his or her life – finances, employment, lifestyle, and so forth. Zero down loans typically carry higher interest rates and higher than average monthly payments. And, even if a person successfully pays back the loan, that person will have paid far more in interest than the typical borrower due to the fact that no down payment was placed. What’s more, a prospective borrower needs to consider the severity of the commitment involved. If you experience a serious financial blow, and you decide to walk away from the loan, that can be a life-altering decision, at least from a financial standpoint. On the whole, it’s basically a positive thing that we’re seeing zero down mortgage loans slowly increase; but there’s lots of reasons to prefer that these types of loans be kept to a small minority of all total mortgage loans nationwide.
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