The risks of zero-down loans in this market: Is this 2008 all over again?

It’s baaaaaaaaaaack….

With Bank of America recently announcing their loan option for lower-income households that requires no down payment, no closing costs, and doesn’t base the loan on a minimum FICO score, you might be wondering if this is 2008 all over again.  Can we really be repeating these kinds of loans and promoting homeownership without learning from past mistakes?

Some could argue that a major mistake of the past was that this kind of loan was given out somewhat haphazardly, without the recipients fully understanding the risks.  However, the new loan from B of A, called The Community Affordable Loan Solution, does require prospective buyers to complete a homebuyer certification course as well as housing counseling that is approved by the U.S. Department of Housing and Urban Development. So no, this is not a loan program that is widely used and is a far cry from the pre-Great Recession era. 

However, a major risk still exists that if the market takes a downward turn and home prices drop, the borrowers could end up underwater on their mortgage, meaning they owe more than the home is worth.  Do we feel confident that a certification program and housing counseling will be enough to prevent a repeat of 2008?  B of A seems to have that confidence, I, on the other hand, am not so sure.

As great as it is to build programs designed to help lower-income households, it remains a very risky double-edged sword.  When more people can buy homes, prices go up.  Higher prices help sellers, but hurts those who are trying to enter the market.   See the catch-22 here?

The bottom line is that this kind of loan will have a higher interest rate, you will still have to carry Private Mortgage Insurance (PMI), and the chances of ending up underwater are still very significant in the near term.  Before moving forward with a zero-down loan, always consider all other options first.  I’m always happy to talk about low-cost or first-time home buyer programs.

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