Zero-down payment mortgages are back – with a difference

WASHINGTON — They were all the rage — then the scourge — of the housing boom and bust. Now they’re back, big time: home mortgages that require tiny or zero-down payments from buyers.

Several major lenders are offering 1 percent down payment loans, and now a large national mortgage company has gone all the way, requiring absolutely nothing down. Movement Mortgage, a top 10 retail home lender, has just introduced a financing option that provides eligible firsttime buyers with a non-repayable grant of up to 3 percent.

This allows applicants to qualify for a 97 percent loan-to-value ratio conventional mortgage — essentially zero from the buyers, 3 percent from Movement.

To illustrate: On a $300,000 home purchase, a borrower could invest nothing from her or his personal funds, while Movement contributes $9,000 from its resources. The loan terms also permit seller contributions toward the buyers’ closing costs to help swing the deal. Duke Walker, branch manager for Movement for the Washington, D.C., area, told me that although the program is brand new, it’s already “going great guns.”

Movement is hardly the only player in this arena. Navy Federal, the country’s biggest credit union, has offered members zero-down mortgages for years in amounts up to $1 million. NASA Federal Credit Union also markets nothing-down mortgages. Quicken Loans, the third highest volume lender according to Mortgage Daily, a trade publication, offers a 1 percent down option, as does United Wholesale Mortgage, another large national lender. The U.S. Department of Veterans Affairs also has been doing federally guaranteed zero-down loans for years.

In the case of Movement’s new plan, the mortgages are being originated for sale to giant investor Fannie Mae, which operates under federal conservatorship. Sensitive to the possibility that critics might perceive it as providing support — and ultimately a federal guarantee — on seemingly high-risk loans, Fannie provided me with this statement: The company “is committed to working with our customers to increase affordable, sustainable lending to creditworthy borrowers,” Fannie said.

Nothing-down loans were among the biggest losers for lenders, investors and borrowers during the disastrous housing bust years, often extended to people whose incomes and debts went undocumented. The latest versions are starkly different. Under federal rules, applicants must demonstrate an ability to repay what’s owed, must have solid if not excellent credit histories and scores, and must document everything.

So how well are these mortgages performing? Quicken says its 1 percent down loans have less than a one-quarter of 1 percent delinquency rate. United Wholesale Mortgage says its version has experienced no delinquencies since its debut last summer. Records like this are possible, the lenders involved say, because 1 percent and zero-down offerings are conservatively underwritten.

United’s minimum FICO credit score, for example, is 720. Quicken’s posted minimum is a 680 FICO, but the young, mainly first-time buyers who use the program have an average score around 750. Movement’s zero-down loan is an exception: Minimum FICO is just 640 in most parts of the country. (FICO scores run from 300 to 850, with higher scores denoting higher creditworthiness.) Maximum debttoratio for the Quicken program is just 37 percent, well below the 45 percent ceiling for most conventional loans that carry much larger down payments.

Most of the programs also charge higher interest rates. Movement’s rate for the zerodown option in mid-June was 4.5 percent to 4.625 percent, compared with 4 percent for its regular fixed rate mortgages. Navy Federal charges 4.625 percent for its 30-year zero downs.

The takeaway here: If you’re interested in pursuing one of these new low or zero-down payment plans, be aware that unlike the bad old days, these come with real qualification requirements and costs expressly designed to minimize defaults and foreclosures.