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Zero-down home loans are back and risky

Putting money down for purchase of residential real estate has costs but provided protection to purchasers and lenders. The reappearance of zero-down loans, those that require no down payment, may apply the notion of penny smart but dollar dumb to real estate.

These loans, also known as 100 percent financing, were used during the national real estate boom in 2003 to 2006 to assist potential homeowners with no financial assets, bad credit and unstable employment. Some loans did not require disclosure of income and debt.

When home values dropped, many owners had mortgages that cost more than the worth of their home which could not be sold to pay off the mortgage. They also had to contend with higher interest rates and funding fees associated with these loans.

After the market crash, these zero loans disappeared from the market. Buyers with a short sale on their credit reports or foreclosures were cut off.

These types of loans recently resurfaced. These are packaged as loans with a zero-down payment with extra fees and high interest rates and piggyback loans comprised of a first mortgage at market rate and a second mortgage at higher interest rates that is used as the down payment. Another grant option is money provided by a bank to the borrower for a down payment. The grant must be paid back with fees in addition to the loan payments.

While these loans may help some buyers, there are serious risks. These include higher expense and financial risks if the homeowner loses a job. It may be advantageous to take out a mortgage on residential rental property that can be used to cover mortgage payments if there are any financial downturns.

Several matters should be reviewed while considering these loans. First, it is risky to believe that a purchase short sale of home can lead to quick profit and the payoff of the mortgage. Next, consider whether mortgage payments are covered if a homeowner loses their job.

A homeowner should consider whether they can deal with fluctuating home values and a down market where the mortgage balance where the mortgage exceeds the home's value. Unexpected repairs, maintenance, utility costs and the costs and commissions of selling the home must be factored in.

An attorney can provide reasonable options for residential property purchases. They can help assure that rights are protected.

Source: The Washington Post, "Zero-down loans are back. Be very leery." By Jill Chodorov Kaminsky, Feb. 19, 2018

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