Zero down-payment mortgages and similar programs appear to have recently been gaining traction on Main Street.
Bank of America announced Aug. 30 that it is launching a trial program, called the Community Affordable Loan Solution, offering mortgages that do not require closing costs, down payments or minimum credit scores. People in predominantly Hispanic or Black neighborhoods in Charlotte, North Carolina; Dallas; Detroit; Los Angeles; and Miami that meet specific income requirements will have access to the program.
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In March, TD Bank launched a similar program that includes a $5,000 lender credit that qualifying borrowers can use on home purchase closing costs or down payments. Qualifying borrowers must meet certain credit and income parameters, as well as reside in a participating market, according to the bank’s press release.
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The most recent data from the National Association of Realtors found that there was a significant racial gap in homeownership in 2020. White households had a homeownership rate around 72.5%, while the homeownership rates for Hispanic and Black households were 51.1% and 43.4%, respectively.
Zero down-payment mortgages, however, have some downsides, according to Bankrate.com chief financial analyst Greg McBride.
“The downsides are that the homebuyers are very dependent on further price appreciation to build a meaningful equity stake and without that, there will not be enough equity to pay the closing costs if plans change and they need to sell in the first few years,” he told FOX Business.
He also told FOX Business that this is the “wrong end of the real estate cycle for zero down payment mortgages.”
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“The risk to borrowers has grown because of the surge in home prices,” McBride said. “If home prices stall, or even decline, a no down payment loan could be setting the buyer up for failure as they won’t have much, if any, equity stake in the home.”
That increases the likelihood of a loan default if the borrower is looking to exit the home, he said.
The housing market has been cooling in recent months. The number of home sale cancelations reached a two-year high in July as roughly 16% of homes that went into contract that month were called off, according to a Redfin analysis. Sentiment among builders also reached a record-low since May 2020.