Despite the bursting of the housing bubble, it's still possible to buy homes with no money down. In fact, it's possible to borrow up to 105 percent of the purchase price, leaving the buyer with more debt than the house is worth.
WASHINGTON — Despite the bursting of the housing bubble, it’s still possible to buy homes with no money down. In fact, it’s possible to borrow up to 105 percent of the purchase price, leaving the buyer with more debt than the house is worth. (One reason buyers borrow more than the purchase price is to cover transaction costs.)
It might sound like a pitch from a late-night infomercial. But the offer comes from Freddie Mac and Fannie Mae, two government-chartered companies with potentially conflicting mandates to uphold prudent lending standards and make homeownership more attainable.
Freddie Mac says its “HomePossible” mortgages can help buyers with limited credit or savings. But, as a wave of foreclosures shows, stretching too far to buy a home can end badly. Without equity in their property, buyers could end up unable to refinance at lower rates or sell their homes if they need to move.
Although borrowers are sometimes required to show they have money in the bank to draw upon in a crunch, Freddie Mac said people can qualify for its no-money-down purchases with no cash reserves.
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However, borrowers must undergo homeownership education. Such programs can reduce delinquency rates by about 34 percent, the company said.
Freddie Mac allows homebuyers to borrow more than the purchase price if they use a second loan, sometimes called a piggyback, from special lenders such as government-housing agencies, nonprofit groups and employers.
Fannie Mae typically applies a similar requirement when homebuyers borrow more than 97 percent of the price. The lender on the second loan may forgive that debt if the buyer stays in the home for five years, said Gwen Muse-Evans, Fannie Mae vice president of credit policy and controls.
The loans have performed well, she said.
Neither company provided delinquency rates for borrowers who put no money down.
Fannie Mae, based in Washington, and Freddie Mac, based in McLean, Va., don’t issue mortgages directly to borrowers. Rather, they funnel money to lenders by packaging mortgages into securities for sale to investors and by buying mortgages for their own investment portfolios. By setting conditions for the loans they will take on, they help shape the options available to consumers.
Both companies are required to devote certain percentages of their funding to what the government defines as affordable housing. Depending on the recipient, no-money-down or low-down-payment loans can help the companies meet those quotas.
Fannie Mae’s Muse-Evans said many buyers want to stay in their homes for five years or longer, and Fannie Mae expects the housing market to stabilize by then.
In the meantime, Fannie Mae and Freddie Mac have been predicting further price declines. Freddie Mac chief executive Richard Syron said last month that nationally, average home prices have fallen 9 percent from their peak, and Freddie Mac expects them to fall at least 15 percent.