Let’s not forget what happened during the housing crash. Many homeowners ended up in a negative equity position. In other words, they owed more on their houses than the houses were worth. I well remember sellers bringing money to the closing so the mortgage could be paid off.
Here we go again with loans that guarantee the borrower will have no equity from the start via zero-down mortgages.
United Wholesale Mortgage (UWM), one of America’s largest mortgage lenders, is offering zero-down mortgages, opening up home ownership to more people but revitalizing a controversial practice that carries as many risks as advantages for cash-strapped home buyers.
Here’s how it works: For first-time homebuyers making 80% of their area’s median income or less…
- Buyers take out a mortgage for 97% of the value of the house they buy.
- The remaining 3%, up to $15,000, is a second interest-free mortgage.
The second mortgage has to be paid back in one payment when the first mortgage is paid off or the house is sold or refinanced.
Under the program homebuyers start without any equity, so if the value of their home decreases, they would instantly owe more than the house is worth.
If a buyer has to sell quickly, they’ll still have to pay back the entire second mortgage or risk default/foreclosure.
Buyers may get stuck with a higher mortgage rate, even if the Federal Reserve starts to cut interest rates because to refinance, borrowers need to have enough cash to pay back the second mortgage.
Please think before you borrow and borrow responsibly.
