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THE NO MONEY DOWN MORTGAGE:
This was launched as a brand new pilot program for first-time home buyers, that aims to help underserved neighborhoods in “designated markets throughout Charlotte, Dallas, Detroit, Los Angeles, and Miami.” This would allow individuals and families to obtain an affordable loan, with no money down, no PMI, no closing costs, and no minimum credit score.
Now, even though these loans ARE intended to help underserved neighborhoods, eligibility is based entirely income and home location, with prospective buyers being required to complete a “homebuyer certification course” prior to applying. This means, ANY first time buyer is able to apply as long as the home falls within the approved zip codes.
On the surface, it doesn’t appear to have many of the “Red Flags” that were associated with the 2008 Housing Crash:
Even though homeowners are putting NO MONEY DOWN, with NO CLOSING COSTS, and NO PMI…they are NOT getting variable interest rate loans, which, arguably – is where a lot of initial trouble started.
Second, it’s currently a pilot program within select zip codes of certain cities…so, even though ANY first time home buyer can apply who meets the eligibility requirement, it’s not prolific enough to affect real estate prices on a large scale.
Third, when people hear “NO MINIMUM CREDIT SCORE REQUIRED TO BUY A HOME,” it’s shown that – by including phone and utility payments – lenders can get a similar risk model and default rate, to calculating credit cards and loan payments – so, it makes SENSE to include alternative data to give people loans who OTHERWISE would not have qualified.
And fourth, unlike 2005’s “NO INCOME, NO JOB, NO ASSET” loans, Bank of America IS looking at income history, employment, and current assets to determine eligibility.
HOWEVER… the issue that I see in all of this, is that – offering NO MONEY DOWN mortgages, at a time where median prices are at an all time high – exposes the buyer to A LOT of risk in the event the market goes down, they lose their job, or – their income declines.
In those scenarios, it’s HIGHLY UNLIKELY that they’ll have enough equity to be able to sell their house, WITHOUT coming out of pocket a significant amount of money…and, essentially “locking them” into fixed monthly payments without a clear path out.
Obviously, this presents a SUBSTANTIAL RISK that – most likely, the person who’s putting no money down, is NOT going to be able to come out of pocket to sell, IN THE EVENT something unexpected happens and the market declines – and, unless prices keep going up – they’ll be “stuck” making the payments on their home, whether or not they can financially afford it.
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