Mortgage Loans – Are No-money-down Mortgages Risky?

by Nancy Woodward

Once upon a time, home buyers were required to make twenty percent down payments when they bought homes. Many people saved their money until they had larger down payments.

Today, it is more unusual to find any one making a large down payment. Skyrocketing real estate prices have surpassed buyer’s incomes and savings. National surveys indicate this trend is increasing in today’s real estate market.

According to the National Association of Realtors, a statistical sampling of a group of 7,500 purchasers from mid-2005 to mid-2006 was conducted and it was found that nearly half of the group of first time homeowners financed the entire mortgage. This means they began owning Real Estate with no equity at all.

An additional thirty percent put less than ten percent down, and twenty percent put down less than five percent. This means eighty percent of first time buyers became Home owners with less than ten percent equity.

Since this survey used information from Experian, one of the three major credit and realty data firms, the numbers are definitely representative of the situation. Experian stated the median down payment was actually two percent.

I consider this trend to be very risky. It is possible these home owners can find themselves with a mortgage and principal balance that is greater than the current market value of their home. In flat and depreciating market conditions, the risks are great.

Five of the top reasons for greater risk are:

1. Real Estate Market fluctuations..
2. Job transfers.
3. Large consumer debt.
4. Corporations downsizing.
5. Trend toward mega-corporations.

I would not recommend making a small to non-existent down payment to anyone who does not have sufficient capital in the event they need it. While I do realize there are many more home owners due to this practice, I consider it to be too risky for the average first time buyer.