Zero down loan packages becoming a popular option, but there are pitfalls

By Patricia V. Rivera

Not even 10 years ago mortgage analysts like Keith T. Gumbinger just shook their heads when someone asked them about buying a home without making a down payment."That used to be the stuff of late-night TV. 'Buy a house with no money down'," says the vice president a HSH Associates, a financial publishing firm in Pompton Plains, N.J. "Now even Fannie and Freddie are backing it up."The reason: Soaring home prices. In the last five years the average price of a new house has risen dramatically, forcing the financial industry to conjure up a host of new loan packages to allow buyers with no savings to enter the marketplace.These new loan packages have proven so popular that a 2004 National Association of Realtors survey found that 25 percent of home buyers financed 100 percent of their mortgage. The survey also showed that two out of every five first-time home buyers used that option.Experts say this trend will likely continue as long as homes continue to appreciate in value."Prices have escalated to the point that no one can save enough money to put a specific down payment," said Yamila M. Ayad, broker/president of Mission Home Loans in San Marcos, Calif., and a board member of the National Association of Hispanic Real Estate Professionals.In the past, lenders required home buyers who could not make a 20-percent down payment to buy private mortgage insurance. That once kept many families from the marketplace but no longer. Today, for example, buyers have the option of choosing to accept higher interest rates for a portion of the loan.No down payment packages come in many varieties and include piggyback loans and interest-only loans.Tim Doyle, director in government affairs at the Washington, D.C.-based Mortgage Bankers Association, says zero down payment loans once accessible only to wealthy borrowers are generally available across all income levels nowadays."The key component today is credit. The higher your credit score, the better chance that someone will extend 100 percent financing," he adds. Larger loans imply larger monthly payments so a history of credit worthiness becomes an important factor.But Doyle and others caution consumers to understand the risks and responsibilities involved with what look like generous loans. Conservative economists worry that smaller down payments are more likely to lead to defaults on loans. Studies have shown that homeowners with greater equity strive to keep payments up to date.There are more practical concerns. Should the much anticipated real estate bust occur and the value of homes drop, borrowers with 100 percent financing may wind up with virtually no equity in their properties.That could be a problem should they decide to move, Doyle points out."With no down payment it takes longer to build up equity. They may not have a cushion to pay closing costs," he says.First-time homeowners should be especially cautious about spreading themselves too thin."I say to a borrower looking for a zero-down loan, 'If your rent is $900 and you're looking at a mortgage payment of $1,800, how are you making that transition?'" Ayad says.Ayad asks the borrowers she counsels to save the amount of their future mortgage payment for a couple months before taking out a loan."You don't want to practice being homeowners by buying a home. There is too much at stake," she says.Today's higher home sales prices don't always mean higher mortgage payments, she adds. Mortgages with interest-only options often a hybrid adjustable rate mortgage or ARM enable buyers to purchase homes they couldn't otherwise afford.These loans offer low interest-only payments for a set period before converting to a high adjustable rate mortgage after anywhere from two to seven years. Monthly payments jump drastically after your "interest-only" period. As a result, using this option can get risky for buyers who don't prepare for those higher payments down the road.Ayad advises buyers who accept one of these creative new loan packages to plan on refinancing their mortgages to avoid those looming high-interest rates. If they do not, she says, the long-range cost of owning the home may become too burdensome."There is no reason for buying a home if you're going to losing it down the line," she says Content That Works