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Nation's Housing

Zero-Down Mortgage Opens Doors, but at a Price


WASHINGTON — A policy change earlier this month by the giant mortgage investor Fannie Mae symbolized a market transformation of huge importance to home buyers.

By adding zero down payment mortgages to its standard line of loans, Fannie Mae closed the door on an era: From Colonial times through the last century, conventional home mortgages always required a cash contribution by the home buyer, the down payment.

It assured the lender that the buyer had a personal investment in the property and would be motivated to pay the debt. In the 1980s and '90s, however, down payments began to shrink. Private mortgage insurers were willing to provide backup coverage to lenders that allowed them to offer 10%, 5% and, more recently, 3% down payments.

Smaller down payments helped fuel the housing boom of the last decade, pushing the national rate of homeownership to its current high, around 67%. Houses that were impossible for young couples to buy with 20% cash out of pocket became readily affordable with 5% down.

Last fall, Fannie Mae's competitor, Freddie Mac, announced that it would go to the next level and buy zero down payment home loans as a standard product. But Fannie Mae cautiously held back until Feb. 6. Now, virtually anybody with a good credit history, anywhere in the country, can buy a house with no cash down. Fannie Mae's program is aimed at first-time buyers; maximum loan size is $275,000. The buyers have to cover closing costs of 3%.

Even the closing cost money doesn't have to be from their own pockets, however. It can be a gift or an unsecured loan from a family member, a nonprofit agency, assistance from an employer or a grant from a local government agency.

All the buyers have to do is contact any of the thousands of mortgage lenders who do business with Fannie Mae. The key criterion for applicants: good credit histories.

Fannie Mae's and Freddie Mac's programs represent just some of the zero down payment opportunities available.

Hundreds of lenders, including most of the biggest and best-known mortgage companies, offer other types of nothing-down plans. Lenders using private mortgage insurance make standard loans as high as $375,000 that represent 103% of the price of the house. Such a loan means not only that the buyer puts zero dollars down when buying a $364,000 new house but also that the mortgage finances the closing costs, up to a total of $375,000.

Andrew May, vice president of product development for United Guaranty Corp., Greensboro, N.C., says the typical zero-down buyers his company insures are financially solid 35-year-olds buying move-up or second houses.

They "want the flexibility to do what they want with their cash," he says.

"These [zero-downers] are people who understand the meaning of 'opportunity cost,' " says May. They know that a down payment of 10% or 20% could potentially cost them substantial financial returns elsewhere. Given the choice of sinking their cash into their houses or investing in higher-yielding business ventures, they opt for nothing-down loans.

Other mortgage insurers also offer coverage on loans of more than 100% of home value. The industry's biggest insurer, MGIC Investment Corp., will insure up to 103% for people whose FICO credit scores are above 700 and whose overall debt-to-income ratios do not exceed 41%.

The FICO score is the dominant credit-evaluation tool used by American lenders. The acronym stands for Fair, Isaac & Co., the firm that developed the software that produces the scores. A 700 FICO, on a scale that runs from the 300s to more than 900, is considered excellent credit.

Is the zero-down mortgage option for you? For some people--young couples with good incomes but no savings--it may be the only way to buy the house they want. Others should keep in mind that a zero-down loan is going to cost more in mortgage payments every month, not just in higher principal and interest charges but in mortgage insurance as well.


Distributed by the Washington Post Writers Group.

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