-- A policy change last week by the giant mortgage investor Fannie Mae
symbolized a market transformation of huge importance to home buyers
across the country. By adding zero down payment mortgages to its standard
line of product offerings for the first time, Fannie Mae closed the
door on an era: From colonial times through the last century, conventional
home mortgages took various forms, but they always required a cash contribution
by the home buyer - the mandatory down payment.
The down payment served to assure the lender that the buyer had a personal
investment in the property and would be strongly motivated to pay off
the debt. In the 1980s and '90s, however, down payments began to shrink.
Private mortgage insurers were willing to provide back-up coverage to
lenders that allowed them to offer 10 percent, 5 percent and, more recently,
3 percent down payments.
Smaller down payments, in turn, helped fuel the unprecedented housing
boom of the past decade, pushing the national rate of home ownership
to its current historical high of around 67 percent. Houses that were
impossible for young couples to buy with 20 percent cash out of pocket
became readily affordable with 5 percent down.
Last fall, Fannie Mae's competitor, Freddie Mac, announced that it would
push the envelope to the next level and buy zero down payment home loans
as a standard product, but Fannie cautiously held back until last week.
Now, virtually anybody anywhere in the country with a good credit history
can buy a house with no cash down. Fannie Mae's program is aimed at
first-time buyers. The maximum loan is $275,000. The buyers needn't
invest any money in the house itself, but they have to be able to cover
closing costs of 3 percent.
Even the closing costs don't have to be from their own pockets, however.
It can be a gift or an unsecured loan from a family member or a nonprofit
agency, assistance from an employer or a grant from a local government
agency. All the buyers have to do is contact any of the thousands of
mortgage lenders who do business with Fannie Mae. The key criterion
for applicants is a good credit history.
People who don't pay their rent on time, who max out on multiple credit
cards or who fail to pay their auto or student loans need not apply.
Fannie and Freddie's programs represent just part of the zero down payment
opportunities now available to aggressive shoppers. Hundreds of lenders,
including most of the biggest and best-known mortgage companies, offer
other types of nothing-down plans. Lenders using private mortgage insurance
make standard loans as high as $375,000 that represent 103 percent of
the price of the house.
That means you put zero dollars down when you buy a $364,000 new house,
and the mortgage also finances the closing costs, up to a total of $375,000.
Andrew May, vice president of product development for United Guaranty
Corp., Greensboro, N.C., says the typical zero-down home buyers his
company insures are financially solid 35-year-olds buying their move-up
or second home. They "want the flexibility to do what they want with
their cash," he says. They prefer to invest it in assets with stronger
profit potential than their house - their own business ventures, for
instance, stock funds or retirement plans. "These (zero-downers) are
people who understand the meaning of ‘opportunity cost,' " says May.
That is, they know that a mandatory down payment of 10 percent or 20
percent could potentially cost them substantial financial returns elsewhere.
Given the choice between sinking their cash into their residence or
into a higher-yielding business venture, they vote with their high-yield
instincts: They go nothing-down. Other mortgage insurers also offer
coverage on loans over 100 percent of home value.
The industry's biggest insurer, MGIC Investment Corp., will insure up
to 103 percent for people whose FICO credit scores are above 700 and
whose overall debt-to-income ratios do not exceed 41 percent. FICO scores
are the dominant credit-evaluation tools used by American lenders. The
acronym stands for Fair, Isaac & Co., the firm that developed the software
that produces the scores. A 700 FICO, on a scale that runs from the
300s to over 900, is considered excellent credit. Is the zero-down mortgage
option for you? For some people - young couples with good incomes but
no savings - it may be the only way to buy the house they want.
For others, keep these points in mind: Zero-down is going to cost you
more in mortgage payments every month, not just in higher principal
and interest charges, but in mortgage insurance as well. In the event
of a job loss or economic downturn, you could find yourself on the wrong
side of the bargain, upside-down on your home debt: Your mortgage may
be more than your house is worth, and you may be forced to sell for