“Zero-Down” Mortgages Are Still Available?by Tim Manni
For a certain set of borrowers they are. Congress has passed on legislation to President Obama for his signature that would effectively renew the United States Department of Agriculture’s (USDA) Single-Family Housing Guaranteed Loan Program.
Mortgage professionals and borrowers alike have been clamoring for this renewal, especially with the expiration of the homebuyer tax credit creating a real buzz in the rural market. Who could blame borrowers for wanting to take advantage of the zero-down financing plus the $8,000 credit, and the lenders and realtors wanted the business that comes along with it.
As we’ve reported, the program offering no-money-down loans in certain parts of the country for low- and middle-income borrowers, exhausted its $13.1 billion funding earlier this year, leaving some would-be buyers fearful their financing would fall through. USDA loans were particularly popular this year as first-time buyers tapped the government’s federal home buyer tax credit. They have until Sept. 30 to close.
Let’s see here: allowing borrowers — who make less than the median income — to make no downpayment on their home loan…how safe is that in a struggling housing market? Isn’t this one facet of “risky” lending that facilitated the housing market crash?
Note: USDA borrowers still have to pay some money upfront, but the cash goes into a self-insuring pool that helps protect lenders against future losses. However, “the fee can be folded into the mortgage,” writes the Wall Street Journal.
While zero-down USDA loans are never far from criticisms, the USDA defends that their loans are safer and default less on a yearly basis than other government programs, even the ever-popular FHA:
The USDA program is considered safer because up to 90% of the purchase amount is guaranteed, meaning the agency will pay should the borrower default.
The USDA has previously said that last fiscal year’s foreclosure rate was 1.72%, well below the Federal Housing Administration’s 3.32%. Borrowers also can’t make more than 115% of a county’s median income, preventing McMansion-sized loans: The average USDA loan is $112,000.
This brings us to a couple interesting questions: Should no-money-down loans — even to a limited audience — be allowed to persist in our shaky marketplace? Should any loan structure that “has a bad reputation” or caused a portion of borrowers to fail in the downturn be eliminated entirely…and isn’t this likely to produce more “underwater” borrowers given still-declining home values in many parts of the country?
However, if you remember our article “In Defense of ARMs, They’re Neither ‘Evil’ Nor ‘Toxic’,” you’ll recall that we argued, while one loan product may not be right for a certain borrower, it may be a perfect fit for the right borrower under the right circumstance; and this may very well be the case here, too (given that they’re properly underwritten).