No-Money Down Mortgages: A Product of the Past
The following may be apparent to some. However, the current subprime crisis proves that it hasn’t been for all:
But saving money for a down payment might soon be the newest trend revisited in mortgage financing the purchase of a home.
This is particularly valid it’s a first home purchase. And especially if your credit score could use a boost, or you’re self-employed.
No-money down mortgages, depended on by millions of first-time buyers in recent years, are fading fast. If lenders aren’t doing away with these loans, they’re at least tightening guidelines.
At Community One Financial in Puyallup, senior loan officer Jayme Coffey said that in the last three weeks she and her colleagues scrambled to find new funding sources for 25 loans that had been preapproved for no-money-down mortgages – sometimes called 80-20 or piggyback loans – that some banks would no longer finance.
“The 80-20 is effectively dead,” she said.
In 2003, 28 percent of first-time home buyers purchased a home with no down payment, according to National Association of Realtors spokesman Walter Molony. That percentage jumped to 45 percent in 2006.
“I imagine that’s declined significantly now,” he said. “To the extent that we’ve seen a lot of risky product pushed on the market, it’s good to see those go away. There was a lot of snake oil out there.”
No-money down loans, or 80-20s, often were comprised of a mortgage that covered 80 percent of a purchase price and a second home purchase loan, usually at a higher rate, that financed the remaining 20 percent.
As home prices escalated and potential buyers itched to grab their piece of the American dream, the industry responded with new, easy-to-get products. And with the expanded availability of loans came more-flexible lending standards that made room for borrowers who couldn’t handle payments or didn’t understand the terms of their loans, experts say.
Adam Stein, president of the Washington Association of Mortgage Brokers, called the recent mortgage lending environment “a credit democracy.”
Not so today.
“There are people right now who aren’t getting home loans. That’s the sad reality,” Stein said. “Right now the market is in an overcorrection.”
Among those left out are self-employed buyers with difficult-to-verify income and buyers with imperfect credit history, Stein said. He predicts the zero-down mortgage products left will continue to retreat in the next six months, just as the 80-20 has.
“I looked for it today and couldn’t find it. I called a couple places where I used to do business,” Stein said last week. “It was offered a month or two weeks ago.”
Chris Dunayski, who owns High Point Mortgage in Puyallup, said mortgages in the near future will look much like what buyers used in the 1980s and 1990s. Twenty to 30 years ago, a 20 percent down payment was considered the norm.
Borrowers who continue to turn to fully financed mortgages will likely also have to turn to mortgage insurance, said Duff Dyer, who co-owns Oxbow Mortgage in University Place. Mortgage insurance requires a monthly payment, usually less than 1 percent of the loan, until the home’s equity reaches at least 20 percent of the loan amount and the insurance has been paid for at least two years, he said.
Given today’s lending climate, Dyer said the first-time buyers he’s seeing are happy to pay it.
Stephanie Taylor, 36, got prequalified two weeks ago for a zero-down mortgage. She’s looking in University Place, North Tacoma and the Wapato Lake area for a brick house measuring at least 2,800 square feet. Her top price: $335,000.
Taylor, who last owned a home seven years ago, said she’s considered making a 10 percent down payment, but doesn’t want to tie up the money she’s saved.
“It’s always good to have cash available that I might need,” she said.
Like Dyer’s clients, Taylor will pay mortgage insurance on her loan, which she expects to retire far sooner than the 30-year term by making two extra payments yearly.