Zero Down Payment Mortgages Make a Comeback

They were all the rage – until the housing market crashed. Now they’re back: home mortgages that require miniscule or zero down payments from homebuyers.

Several major lenders are offering 1 percent down payment loans, and now a large national mortgage company has gone all the way, requiring absolutely nothing down, the Real Deal reports. Movement Mortgage, a top 10 retail home lender, has just introduced a financing option that provides eligible first-time buyers with a non-repayable grant of up to 3 percent. This allows applicants to qualify for a 97 percent loan-to-value ratio conventional mortgage — essentially zero from the buyers, 3 percent from Movement. 

Movement’s new mortgages are being originated for sale to giant investor Fannie Mae, which operates under federal conservatorship. In a statement, Fannie says the company “is committed to working with our customers to increase affordable, sustainable lending to creditworthy borrowers. We continue to work with a number of lenders to launch test-and-learn pilots [pilot programs] that require a 97 percent loan-to-value ratio for all loans we acquire.” The statement added that all of them are “focused on reaching more low-to-moderate income borrowers through responsible yet creative solutions.”

Nothing-down loans were among the biggest losers for lenders, investors and borrowers during the disastrous housing bust years. So what’s different now? Under federal rules, applicants must demonstrate an ability to repay what’s owed, must have solid if not excellent credit histories and scores, and must document everything. In other words, the borrower must prove that he or she is credit-worthy. 

So if you’re interested in pursuing one of these new low or zero-down payment plans, be aware that unlike the bad old days, these come with real qualification requirements and costs expressly designed to minimize defaults and foreclosures.