No Money Down Gains More Buyers

Akron Beacon Journal - July 31, 2005

Many choosing convenient route, but financial responsibility is key
by Gloria Irwin

The Akron Beacon Journal

Twenty-seven-year-old Tiffany Herbert is about to become a homeowner — and it will cost her only about $800 or so.
A first-time buyer, she’s paying $64,000 for a two-bedroom home in the Goodyear Heights neigborhood of Akron.

She’s not making any down payment.

The seller is paying most of the closing costs.

The small amount that Herbert is paying up front will go toward the remaining closing costs and a year’s worth of homeowner’s insurance.

She’s getting a 30-year, fixed-rate mortgage at 6 percent. Her monthly payment will be about $435, plus property taxes and insurance.

That amount includes $51 for private mortgage insurance, which traditionally is charged to buyers who have less than a 20 percent down payment.

Had she been willing to pay a higher interest rate, Herbert could have opted to have the lender pay the PMI instead.

Buying now rather than waiting years to save a down payment makes sense to Herbert, an accountant for a tile company.

“I don’t want to waste my money on rent,” she said.

Buyers like Herbert are becoming increasingly common.

Based on a national survey, the National Association of Realtors estimated 42 percent of first-time home buyers last year didn’t make any down payment. Even more surprisingly, 13 percent of repeat buyers — people who had previously owned a home — made no down payment.

No local statistics

Local statistics are not available, but lenders here agree that no-down-payment mortgages have exploded recently.

Mary Schoenfeld, vice president and manager of Broadview Mortgage Co. in Copley Township, estimates that fully half of her customers now do not make any down payment.

“It’s what the consumer wants, and that’s how they’re buying houses,” Schoenfeld said.

Consumers don’t have to settle for buying inexpensive homes either. Mortgage giant Fannie Mae, which purchases mortgages and resells them to investors, caps loan amounts at $359,650 for a single-family home.

The concept of buying a home with no down payment is so new, no solid studies have been done on whether borrowers are more likely to end up in financial trouble.

With no down payment, buyers are financing the full purchase price. They won’t have equity to fall back on in case they lose a job, get divorced or have an unexpected medical problem.

Buying a house without a down payment was unheard of until recently. Walter Molony of the Realtors association said his group never asked about no-down-payment mortgages until 2003 “because they just weren’t available. It just was not an issue.”

That all began to change in the late ’90s because of improved credit scoring programs. Lenders increasingly found that credit scores, which measure how a consumer handles debt, were a better way of determining a borrower’s credit worthiness. Previously, lenders looked more at income levels, ratio of debt to incomeand an applicant’s assets.

FannieMae and Freddie Mac — the private mortgage companies created by Congress to make sure mortgage money is readily available to home buyers — got the ball rolling in 2001 with products designed to cover down payment costs.

Most local banks and mortgage companies now offer conventional no-down-payment loans, although many savings banks do not.

With interest rates remaining low and a government policy promoting homeownership, more and more consumers are jumping into real estate.

Whether consumers ultimately will be helped or hurt, though, depends on how they handle the financial responsibility of homeownership.

“I think in balance it’s a good thing that we have more homeowners,” says Mary Morstadt, senior vice president and specialty lending manager for National City Mortgage.

“If we can get someone in a home sooner, they’re building equity so they’re starting to create wealth,” she said. “Owning a home is typically the best way for an individual or family to build wealth.”

Brian R. Nichols, co-owner of Chervenic Mortgage Group LLC in Stow, worries about the impact on consumers.

“Look at our foreclosure rate. It’s insane,” he said. “It’s partially the lenders’ fault.”

A recent report found that foreclosure filings remain at record highs in Summit and several surrounding counties. But the Policy Matters Ohio report didn’t examine the circumstances that led to the foreclosures.

Fannie Mae has the most experience with no down payment loans. One manager said borrowers appear to be keeping up with payments.

“I wouldn’t say they’re defaulting more frequently,” said Uma Meale, senior product manager.

Risk of defaulting

Lenders traditionally believed that the risk of defaulting — or not paying — on a mortgage was directly tied to how much money the consumer had in the house. A borrower with a 20 percent stake was presumed to be less likely to lose the house through foreclosure.

“From a lender’s perspective,” said Jan Pynappel, national product mortgage manager for Cleveland-based KeyCorp, “the less money that customer puts down, the more risk that a lender takes.”

Using new computerized underwriting programs, lenders have found they could ease some of the down payment and credit standards without significantly increasing their loan risks.

Now, even customers who have missed some payments usually can qualify for some kind of mortgage.

“It’s been a long time since I’ve seen a loan turned down,” Nichols said.

Borrowers do pay for the looser lending terms, though. Depending on their individual situation, they’ll be charged a slightly higher interest rate or be required to pay more points to compensate for the increased riskiness of their loan.

Tacking on an extra half-percentage point, though, when interest rates hover at 40-year lows leaves borrowers with still-affordable monthly payments.

Financial counseling

At National City, borrowers often are required to go through financial counseling so they have a better understanding of budgeting, Morstadt said.

Schoenfeld, at Broadview Mortgage, said she often requires borrowers to have some savings on hand.

For the past two months, federal banking regulators have been cautioning lenders about the explosive rise in risky mortgage loans.

Regulators from the Federal Reserve to the Office of the Comptroller of the Currency worry about the surge in no-money-down mortgages, interest-only loans andlow-document loans that require no proof of a person’s income.

So far, though, there’s been little sign that lenders are slowing.

With national home sales seemingly headed for yet another record year, brokers and loan originators are under pressure to find ways to qualify buyers.

Schoenfeld at Broadview Mortgage said customers often say they’ve gotten loan approval elsewhere. It may be at a higher interest rate, but some borrowers are willing to pay more to be able to get into the house they want.

“We all make money on these deals,” said Nichols at Chervenic Mortgage. “If people don’t have a down payment, we don’t even blink.”

Generally, brokers don’t pay a penalty if borrowers later default. (One exception is the Federal Housing Administration, which requires lenders stay within a certain percentage of defaults.)

Shopping for mortgage

A few days ago, Nichols prepared the mortgage for Herbert, the accountant. She shopped around and called several other brokers before selecting Chervenic Mortgage.

Herbert, with a degree in finance, is well aware of the responsibility she’s taking on.

“It’s very exciting, but very frightening,” she said.

She has student loans to repay from her undergraduate and graduate years in Florida and some credit card debt. She said she has started “a small retirement plan.”

She hopes to close on the house in mid-August, and is looking forward to having “something of my own” after several years of living with her family.

She intends to avoid the pitfalls of piling up too much debt. “I know what to do. It’s just always hard doing it.”

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