43% of First-Time Home Buyers Put No Money Down

Here's one for the "yikes, yikes, and triple yikes" file!!!! USA Today reports that 43% of first-time home buyers purchased their homes with no-money-down loans. And if this isn't bad enough, the average first-time homebuyer put down only 2%. The sad details:

The trend is potentially ominous. The real estate market is cooling in some areas, and rates on adjustable-rate loans are creeping up. As a result, some no-money-down buyers could owe more than their homes are worth.

Who are entry-level buyers?

• Median age: 32
• Median household income: $57,200
• Median down payment: 2% (on home costing $150,000)
• Purchased with no money down: 43%

Already, home prices in many areas are declining, and the "For Sale" signs are hanging in front yards longer.

Baker and other economists are concerned that many lenders have pushed a series of creative but potentially dangerous loans to help more Americans afford a home.

These people are locking themselves into debt that will take a long, long, long time to pay off. While I agree that it's usually smarter to buy than rent, most people take this to an extreme and bite off too much house from a costs standpoint. Too many people stretch as far as financially possible to buy as big of a house as they can, and then when an unexpected financial emergency arises (which they always do), the dream home turns into a nightmare. Don't let this happen to you.

Here's what has worked in my life:

1. Live in (or move to) a cheaper area of the country. (And after retirement, you may want to save more by retiring in a foreign country.)

2. Buy a house you can easily afford, putting at least 20% down.

3. Put extra payments into your budget.

4. Put bonuses, gifts, second job income and all other "extra" sources of money into paying off the loan.

5. Become debt free in 7-10 years.

My wife and I have been debt free for almost 8 years now and believe me, it's a great feeling.

Comments

[Dus10]

It IS scary. Of course, I am never ordinary. When I bought my first home, I made $26K, was 19, and got a $130,000 home with no money down; it turned out to be a recipe for disaster. We sold the home for a loss when things got a bit hectic. I just bought my second home (more like a second opportunity at purchasing my first home), and the tables have turned. I got 600 more square feet for $10,000 less (exact same neighborhood). I put nearly 20% down, and I make more than twice as much. We are in a much better financial situation, and we are actually sending in extra principal starting February 1st!

[David Porter]

Dear FMF,

Sometimes the headlines can be deceiving. The information you quoted is very true. It comes from a recent NAR report just out.

The good news, behind this article, is that American Home Ownership is at the highest it has ever been! The low/zero down payment loans are a big part of this.

Certainly in some parts of the country where prices have been skyrocketing, a zero down loan would be a bad idea.

But in other parts of our country, like the Midwest and Michigan, this loan is a very valuable tool for the first time homebuyer.

I say all this to suggest that we don't throw the baby out with the bath water.

Just like everything else, a professional to help sort this all out is a good thing to have in your life.

I also wish you the greatest of success with your new Blog Network. I have been watching your success for some time and have enjoyed your work.

[FMF]

David -- Thanks for the kind thoughts, I appreciate them.

Under what circumstances would it be advisable for someone to take out a 0% down loan? I can't think of any.

[David Porter]

Dear FMF,

Let's say that you and your wife are both 28 years old, have your college degrees in hand and have been working in your new professions for a year or so.

Let's futher assume that between the two of you the household income is $80,000 and the debt you have is one car loan, some student loans, and a small credit card balance.

Here is the quandry: Continue to pay $900/month for rent and save a downpayment or get a zero down loan and begin to build equity through appreciation and have Uncle Sam help you make the payments with your new tax deduction.

First of all, please understand that I am not thinking "nationally" in my answer. My answer would be different to someone in California then it would be to someone in Michigan.

Everything we do has risk! Making a rent payment has risk in that you are spending money with no hope of return.

Here are some critical criteria that must be met:

1.) You must be willing to commit to the house for 3 years to break even and 5 years to have a return.

2.) I always advise pre-payment on these loans if affordable to shorten the 5 year investment return.

3.) Have a good Realtor! You must understand Location, Location, Location.

4.) In years 3-5, assuming market rates co-operate, a refinance MIGHT be in order to remove the second mortgage and/or PMI insurance that went with the loan. Typically after 2-3 years there has been at least 10% appreciate to accomodate this.

5.) Don't make large improvements to a home unless you intend to stay longer than 10 years. Cosmetic improvements are a plus.

The "Zero Down" mortgage is not a new product. I have been helping young families with this strategy for many years.

This all works because of primarily two things:

1.) Leverage. The young couple in my example would probably buy a $140,000 home in our market that would conservatively appreciate to $175,000 in 5 years.

2.) Tax Deduction. Uncle same is going to pay around 25% of their interest expense. The State of Michigan may also chime in with some tax relief for property taxes.

Michigan Bonus Reason - we are in the midst of a strong buyers market. Having seen this in the past, I would suspect that a $175,000 value in 5 years will make my assumptions on the low side.

I have certainly also met with young couples where I suggested that they continue to rent. Everyones situation is different and applying a "zero down loan is bad" logic to everyone is not healthy either.

I have been doing this for 20 years and have leant nearly a billion dollars to my clients. I can't think of one young couple that this advice has hurt. As a matter of fact, they all thank me later on down the road.

Again, my point was not to throw the baby out with the bath water. The Zero Down Loan is good for some, and horrible for some.

When I have a disiplined young couple in my office with good credit, can commit to the items above, and who really desire to own their own home, then I am happy to show them how to make it work.

I hope this is taken with the spirit in which it is intended!

[FMF]

Mind if I post your response as a post and let the readers comment? It should be an interesting discussion.

[David Porter]

Not at all. I believe that dialogue is always good. We had some interesting dialogue in the past and it always seems that some from the hard left of the conversation and some from the hard right of the conversation are the ones that tend to speak up.

But this whole blogging medium is designed to let people ask questions and speak their minds.

As long as opinions are considered and respected by all, then only good can come of the dialogue.

Dave

[mysticaltyger]

The thing about the 0% down payment is....the financially motivated people don't really want or need them in the first place. I believe the 0% down payments appeal to the financially clueless or those who want a house at any price for emotional reasons. Sure, there are maybe some people who this would be good for, but Dave conveniently leaves out the fact that people who pay nothing down will have to carry private mortgage insurance until they get up to 20% equity.

[shaneiquah wright]

i want to buy house with no money down

[Angie]

There are pros and cons to every situation. My personal opinion is that if a person is responsible then the zero money down is a great opportunity. With the rising cost of everything we need for daily living, it becomes increasingly more difficult to save that 20% down on an average $100,000 home. Some people like myself have medical issues that build up high medical bills even with insurance. I live in Ohio where I pay $750/month for rent. I was forced to leave from my last home. This was not because I didn't pay the rent but the landlord sold the property and the new owners wanted to move in. I had to relocate my family in the middle of winter and had very little time to evacuate. The place I live in now is a newer mobile home with not too much outdoor or indoor space. I've been looking for months and not able to find anything that has something better to offer. Most places have strict guidelines as to what you can and cannot do. They have no pet policies, no smoking policies, no swimming pool or trampoline policies and even bi-weekly inspections. Some applications for renting are worse than for buying. For example, one property owner required credit and background checks for everyone in the house and even wanted to know my account number at my bank! Needless to say, I'm not living there. I would relocate to another area but I enjoy being around my family like most other Americans. Not to mention, the job market isn't that great and who's to say that you will get another job somewhere else that offers benefits like mine does now? Yeah sometimes you might end up paying more than your house is worth. But if you don't change houses like clothes, then what's the big deal? When renting a place you keep spending money on rent and possibly making upgrades and personalizations to a home that you will never own. You will never get that money back. It might take you few years longer to own the house but at least it's yours! No one can tell you what you can do and what you can't. If you want to have a puppy for your young daughter, you can do it. If your mom comes over and wants a cigarette, she can have one without having to stand outside in the snow. Another great point is you don't have to make your work schedule revolve around home inspections. Best of all (not that I have anything to hide) is you can keep your personal information just what it is supposed to be....personal. The bottom line is simple.
If any of these following statements apply to you:
*You want the freedom of doing what you want without having to ask for permission
*You pay more or the same amount of money for rent that it would cost you to buy a home
*You want the security of knowing you have a stable home as long as you pay your mortgage
*You have a difficult time saving 20,000 while paying outrageous rent prices
*Or you just plain like your privacy
Then a no money down mortgage would definitely be a chance of a lifetime opportunity!