Will low and no down payment loans cause another housing bust?

By Amy Patterson


In a word, no. Low and no down payment loan programs have often gotten a bad rap – with notions that those who are often procuring them, are unable to actually afford a home and are likely to default. Some even say that it was low and no down payment loans that caused the housing bust, but that is just part of the misconception about low and no down payment loans and what effect they have on our economy.

After the housing bust, low and no down payment loans became incredibly scarce, if not obsolete, and it’s taken a while for them to return to the mortgage world. Now that they have, let’s address a couple of misconceptions about them:

  •          They caused the housing bust – it was subpar lending standards and a lack of underwriting stringency caused the housing bust.
  •          People who can’t afford a down payment won’t be able to make payments – We find that it’s quite the opposite. Many skeptics believe that home owners with negative equity are more likely to walk away from their home, when in fact, according to a Zillow study last year, almost 10 million people were living in homes with negative equity.
  •          They are too risky – There are lending standards for low and no down payment loans just like there are for FHA loans. Borrowers are still required to have a certain income-to-loan ratio as well as a minimum credit score.
  •          The default rate is high – VA loans, which are one of the most popular zero down payment loans, had a default rate of 16% for loans originated in 2007 (the worst year), whereas, FHA loans (which require a minimum of 3.5% down) had a default rate of 36%.

Low and no down payment loans have the potential to help the economy recover. By providing more people with the opportunity to buy a home rather than continue renting, the housing market will continue to grow and consumers will continue to invest in housing, and in the economy as a whole.

Want to know more about Stockton Mortgage’s low and no down payment loan options? Talk to a mortgage banker today – (502) 227-1100.

Are you thinking about buying your first home? Check out our First Time Home Buyer’s Study Guide.



Tags: Loans, Mortgage, Home, Home Loans, 100% financing, USDA loans, VA loans