Main Street USA Hit by Zero Percent Mortgages

Zero down-payment mortgages and similar programs appear to have recently been gaining traction on Main Streets across the U.S.

Recently, Bank of America announced that it is launching a trial program called the Community Affordable Loan Solution, which offers mortgages that don’t require down payments, minimum credit scores, or closing costs. People in predominantly Black and Hispanic neighborhoods in Detroit, Dallas, Miami, Los Angeles, and Charlotte, North Carolina, that meet specific income requirements will be able to access the program.

In March, TD Bank launched a similar program that includes a $5,000 lender credit that buyers who qualify can use on closing costs or down payments to use on a home purchase. Qualifying buyers must meet certain income and credit guidelines and live in a participating market, according to a press release by the bank.

JPMorgan Chase also expanded its grant program back in February 2021, offering $5,000 for down payments and closing costs to homebuyers who purchase homes in neighborhoods that are lived in by predominantly minorities.

Data made available by the National Association of Realtors found a notable racial gap in homeownership. While white households had a homeownership rate of around 72.5%, homeownership rates for Black and Hispanic families were 43.4 % and 51.1%, respectively.

Downsides to zero down-payment mortgages

However, according to Greg McBride, chief financial analyst of Bankrate.com, zero down-payment mortgages have some downsides.

“The downsides are that the homebuyer are very dependent on further price appreciation to build a meaningful equity stake, and without that, there will not be enough equity to pay the closing costs if plans change and they need to sell in the first few years,” said McBride.

He also said this is the “wrong end of the real estate cycle for zero down payment mortgages.”

“The risk to borrowers has grown because of the surge in home prices,” said McBride. “If home prices stall, or even decline, a no down payment loan could be setting the buyer up for failure as they won’t have much, if any, an equity stake in the home. That increases the likelihood of a loan default if the borrower is looking to exit the home.”

In recent months, the housing market has been cooling. The number of cancellations of home sales reached a two-year high in July as around 16% of homes that had gone into a contract that month were called off, according to an analysis by Redfin. Builder sentiment also reached a record-low not seen since May 2020.

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