FHA wants to insure zero-down mortgages
Zero-down home loans have gone so mainstream
that the federal government wants to get into the act.
Borrowers would be able to take out no-money-down
mortgages insured by the Federal Housing Administration under a
proposal by the housing department. Right now, FHA-insured loans
are limited to a maximum of 97 percent of the home's price, meaning
that homeowners have to come up with a 3 percent down payment.
FHA-insured, zero-down loans won't be available until
October at the earliest, because the proposal will be included in
the Department of Housing and Urban Development's fiscal 2005 budget
proposal. The fiscal year begins Oct. 1. Allowing zero-down, FHA-insured
mortgages would require congressional approval.
Under the proposal, home buyers not only would be
able to get FHA-insured loans with no money down, but they could
roll some closing costs into the loan. The maximum loan size, then,
would be 103 percent of the home's price.
Help for first-time buyers
The proposed change would remove the biggest obstacle facing first-time
home buyers, says John Weicher, the federal housing commissioner.
"This initiative would not only address a major hurdle to homeownership
and allow many renters to afford their own home, it would help these
families build wealth and become true stakeholders in their communities,"
The Bush administration has a goal to create 5.5
million new minority homeowners by 2010. The FHA estimates that
the zero-down option would generate 150,000 new homeowners in the
Not many years ago, zero-down loans for consumers
were rare. Later, they were a fringe product. They are riskier
for lenders because zero-down borrowers are deemed more likely
to default, and when they do default, the lender is more likely
to lose money. But as mainstream mortgage lenders have found that
they can make money by lending to shaky borrowers at high rates,
zero-down loans have become widely available. Now, under HUD's proposal,
lenders would be able to offer zero-down loans and let the FHA insurance
pool assume the risk. The insurance pool is funded by borrowers,
not by taxpayers.
How they would work
FHA borrowers would pay more, both upfront and monthly, for the
privilege of not making a down payment. Today, if a home buyer makes
a 3 percent down payment and gets an FHA-insured mortgage, the buyer
pays an upfront mortgage insurance premium of 1.5 percent at closing,
and half a percentage point is tacked onto the interest rate. Under
the proposal, a riskier zero-down loan would incur a mortgage insurance
premium of 2.25 percent at closing, and three-quarters of a percentage
point would be added to the interest rate for the first five years
of the loan. After five years, the interest rate would be reduced
by one-quarter point.
It would mean slightly higher payments for zero-down
borrowers. Consider the case of Jack, who puts 3 percent down and
borrows $100,000, and Jill, who gets a zero-down loan for $100,000.
Both get their loans when mortgage rates average 6 percent for people
with good credit who put 20 percent down.
Jack would pay a $1,500 insurance premium as
part of his closing costs. He would pay 6.5 percent interest, for
monthly payments (principal and interest) of $632.07. Jill would
pay a $2,250 insurance premium as part of closing costs (or $750
more than Jack) and would pay 6.75 percent interest, for monthly
payments of $648.60 ($16 more than Jack's monthly payment). After
five years, her monthly principal and interest would drop to $632.07,
the same as Jack pays.