The zero-down program allows borrowers to finance 97% of a home’s value with a first mortgage and cover the remaining 3% (up to $15,000) with a second mortgage
The United Wholesale Mortgage (UWM) launched a new “zero-down” mortgage plan targeting first-time and middle-income buyers. However, the decision has raised concerns about potentially fueling another housing bubble similar to 2008.
What is a zero-down mortgage?
UWM’s program allows borrowers to finance 97% of a home’s value with a first mortgage and cover the remaining 3% (up to $15,000) with a second mortgage.
It also requires that
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Borrowers should be at or below 80% of the Area Median Income or are first-time homebuyers.
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The assistance loan is repaid by the end of the mortgage term, typically 30 years.
Though the program aims to help more people become homeowners, it carries several risks.
Experts are worried about the second mortgage that must be paid in full in one payment when the first mortgage is paid off or when the home is sold or refinanced.
The main risk is that since buyers won’t be putting any down payment, there will be no equity. So, if the housing market cools, homeowners will owe more than the home is worth.
If a buyer has to sell quickly, they will have to pay the second mortgage. If the cash is lacking, they risk defaulting or foreclosure.
Borrowers may get stuck in high interest rates even if the Federal Reserve reduces them.
Dismissing these concerns, America’s largest mortgage lenders assert that their strict underwriting guidelines ensure high-quality loans. They argue that criticism is uninformed. They claim the program removes barriers for renters who cannot afford a down payment, viewing it as a positive step for potential homeowners.
The Fed’s high interest rates and skyrocketing house prices keep homeownership sentiment at record-low levels. According to a recent survey by the New York Federal Reserve, renters who believe they would own a house fell to a record low of 13.4%, down from 15% in 2023.