No Down Payment Dangers
The Dangers of No Down Payment
For many first-time home-buyers, the allure of no-money-down loans can be really hard to resist. In fact, the latest survey by the National Association of Realtors shows that an amazing 43 percent of first-time buyers used that type of mortgage to purchase a home last year.
Unfortunately, the danger — seldom discussed, but very real, nonetheless — is that those owners could actually end up owing more
money than their home is worth. That becomes a significant challenge if they need to sell during a time when their property value does not meet their mortgage amount.
The new survey analyzes home buying activity for 2005 and found that the average age of first time home buyers last year was 32. Their median household income was about $57,000 a year. True, some purchasers do consciously choose to leverage by not using their liquid assets for down payment. But by taking a mortgage for 100 percent of the value of the home, others may be buying the property before they have been able to save enough for a down payment or are in a financial position to handle the costs of owning.
Not surprisingly, some financial experts believe that it is a better idea to stick to the standard, time-honored 10-20 percent down payment. Says Ray Martin, CBS’s personal finance advisor, “These no-money-down loans are popular because first-time buyers perceive home prices are just going up,” adding that people may feel pressure to jump into the market while they can — that is, while prices are still relatively affordable. “People are probably also doing this because they are buying more home than they could otherwise afford, thinking that’s a good idea, too.”
Martin says a 100 percent mortgage can haunt a borrower. “Let’s say you get a new job and have to sell the house and move, and you are in a region where prices did not go up; they actually fell,” he said. “You are going to have to write a check to your lender at the closing table so the buyers can take that home off your hands. You have to pay money to sell your house. That’s called being under water.”
As for specific trouble spots, the regions that appreciated the most in the last four or five years are forecast to be most at risk for a price fall between now and 2008. According to Martin, those regions are primarily along the east and west coasts and include Sacramento, San Diego, Los Angeles, Boston, Providence and Long Island, among others.
As for this year, the National Association of Realtors says sales are probably going to decline 4.5 percent to 5 percent on existing homes, although prices in some regions may still edge higher. Martin also said he is hearing the term “transitional market” for the first time since 1990. “The market is moving away from a seller’s market to a buyer’s market. That means sellers put their houses on the market trying to sell urgently, to get out at the
top,” Martin said. “Buyers don’t know what to pay because they are feeling like it’s a little frothy and maybe prices will come down.”
“Realtors, caught in the middle between the two parties, don’t know how to advise buyers and sellers. There’s confusion, and Realtors who have been pros in the business for a long time tell me it’s the hardest market to negotiate … especially for first-time buyers.” For buyers who opt for the no money down loan, Martin has two suggestions.. “Start saving and paying extra toward the principal on that loan so you are eventually making your down payment now,” he said. “Or you can refinance the loan with down payment money into a fixed rate loan to get into a better position in case values in your area dip.”
Contact Joyce Giaconia at HSBC Mortgage if you have any questions 585-292-1220 Ext. 315 or joyce.a.giaconia@us.hsbc.com