Zero-Down Mortgage

Zero-Down Mortgage
By Larry Cox, Jr

The mortgage industry has seen quite the cataclysmic shift over the past 24 months. Programs have been eliminated and guidelines have been drastically tightened in an attempt to bring stability and accountability back into an industry that allowed its standards to be lowered and guidelines abused through a series of political and bureaucratic decisions that could fill a tome of its own. An entire category of zero down mortgage programs has been eliminated in the aftermath.

As recently as 2007 Fannie Mae and Freddie Mac, both government sponsored entities now in receivership, allowed for no money down mortgages to scores as low as 620 with full income documentation. One program however, allowed for the buyer to state and additional 25% of the gross earning as undocumented stated income. You can just imagine the abuse this lead to. FHA even had a version of zero down financing believe it or not. While the venerable old government agency with depression era roots never flat out allowed a zero down mortgage loan they did allow the contract sales price to be manipulated to achieve the same outcome.

Here’s how it worked, the seller was allowed to funnel the required 3% down payment through a disinterested (a loosely applied term) third party which acted as a charitable (another questionable descriptive) organization who would in turn provide the down payment to the buyer at closing. This is on top of raising the sales price by as much as 6% to cover the buyer’s closing costs. This translates to a nine-percent inflation in property values nationwide on many FHA financed properties. Needless to say the delinquency and foreclosure rate on these loans is higher than traditional FHA loans. Credit scores were not considered on FHA loans during this period of loose lending standards. Congress outlawed seller funded down payment assistance programs in October 2007.

Sub prime lenders took the madness to a whole new level. While scores were relatively important in the world of sub prime lending income documentation was less of a concern. Sub prime investors, with the backing of Wall Street firms such as Bear Stearns, Lehman Brothers, and Merrill Lynch to name a few, actually allowed borrowers with scores as low as 580 to merely “state” their monthly household earnings. Again, you can just imagine the abuse this led to. When you hear stories of migrant workers being foreclosed on in Arizona and California in $700,000 homes and wonder how they bought them in the first place, now you know.

The news from the housing front isn’t all gloomy for there is one ray of sunshine for cash strapped homebuyers in these darkest of days. There is still a source for a zero down mortgage and it is the USDA 100% home loan program commonly referred to as the RD or rural development program. Now before you say “here we go again” or “didn’t we learn our lessons” you must understand that this program has been in existence for many years and has a portfolio of loans that are performing much better than the national average.

The reasons for the success of the program are easy to outline. The USDA zero down mortgage program has always required full income documentation with a verified two year work history. Partially stated income has never been acceptable on USDA loans. The current minim score requirement is 620. Historically the program has allowed for lower scores to receive approvals but there had to be quite a few offsetting compensating factors. Credit history is a crucial part of receiving a USDA approval with verifiable trade lines and/or canceled checks to back up repayment histories.

All USDA loans require a 2% guaranty fee that is financed over and above the purchase price. This fee is used to offset the need for private mortgage insurance (PMI) which is a big saving’s monthly. In April 2009 a long awaited improvement to an already great program finally took effect. That was the simplification and streamlining of the income limits imposed under the program. In a nutshell the changes mean more people qualify for the zero down mortgage loan and more properties, especially those of higher value, are now eligible.

The program is geographically restricted but there is an easy web site sponsored by the USDA to check the eligibility of a potential property. In middle Tennessee one company has even sponsored a web site, www.easybuytnhomes.com, featuring USDA eligible homes currently listed for sale. This site features additional information on the program as well. To speak with a USDA loan professional call 866-220-9646 for a free consultation.

There has never been a better time to purchase a new home. Rates are at historical lows and home values are at rock bottom. Thanks to a well managed government loan program there is a way for the homebuyer with a solid work history and positive credit history to take advantage of a great zero down mortgage.