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Calm down, “zero down loans” isn’t a cuss word

Zero down loans are on the rebound on a small scale, but is it really such a horrible thing for the housing sector?

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“Zero Down” nearly a cuss word

The term “Zero Down Loan” is almost guaranteed to induce an immediate negative response in any one hearing the term. After all, unlike many other terms that we became reluctantly familiar with during the financial crisis (think tranches, negative equity, mortgage backed securities, bond insurance) the term “zero down loan” is easy to understand. We all know what a down payment is, and we all know what zero is. And “common sense” says they don’t belong together.

The fact that two credit unions – Navy Federal and and NASA Federal – have had great success and a very low default rate with their zero down loan program over the past two years backs up my personal experience that the financial crisis wasn’t the result of zero down loan programs, but the result of zero underwriting loan programs – either by carelessness or purposeful deceit by the major banks.

The key to a successful lending program

The key to any successful lending program is smart underwriting. And anyone that got a mortgage in the years leading up to Lehman Brother’s bankruptcy in the fall of 2008 will attest that underwriting standards were “aspirational.”

Which meant that as long as you could document that you aspired to pay back your loan, regardless of your documentable income or means, you could have the loan. While aspirational underwriting isn’t entirely to blame for the financial crisis, it certainly played a significant role.

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If you were hoping for a laundry list of reasons why zero-down loans are a bad idea, you’ll have to look elsewhere. Zero down loans are just one tool that can unlock home ownership. Like every other tool, it can do great good when used appropriately or cause great damage when used recklessly.

Zero down loans are just one tool

The buyers I’ve worked with in San Francisco that purchased with zero down have all been incredibly solid people that remain in their homes to this day. That’s right: My experience with zero down programs and my buyers is zero default. Why?

The buyers that I know that have used zero down loan programs were incredibly successful and hard working individuals that had everything needed to buy a home except the down payment. They weren’t looking to increase their leverage, make a quick flip, or qualify for a home that they otherwise couldn’t afford. All they wanted was to be homeowners in San Francisco, and that dream came true thanks to zero down loans.

But then there are reasons they don’t make sense

There are a few situations where zero down loans don’t make sense and should never be allowed. Investment property is one such example that comes to mind immediately. It’s one thing to walk away from a loan – “strategically default” – on an investment property. It’s an entirely different act to walk away from the home that provides the roof over your head. Regardless of the financial equity in either situation, a homeowner occupying the property is far more emotionally invested in continuing to have a roof over their head.

So I say bring on the zero down loan programs. As long as zero down loan programs are tightly coupled to thorough underwriting standards, I believe they are a great tool for helping broaden access to the real estate market for first time buyers. A smart loan to a well-qualified buyer that has been extensively vetted is a smart loan regardless of the buyer’s down payment.

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Written By

Matt Fuller brings decades of experience and industry leadership as co-founder of San Francisco real estate brokerage Jackson Fuller Real Estate. Matt is a Past President of the San Francisco Association of Realtors. He currently serves as a Director for the California Association of Realtors. He currently co-hosts the San Francisco real estate podcast Escrow Out Loud. A recognized SF real estate expert, Matt has made numerous media appearances and published in a variety of media outlets. He’s a father, husband, dog-lover, and crazy exercise enthusiast. When he’s not at work you’re likely to find him at the gym or with his family.

2 Comments

2 Comments

  1. Greg Cook

    May 17, 2013 at 10:57 am

    You’re right Matt, “skin in the game” is over rated as a predictor of default. History of managing debt and a debt to income ratio at 45% or less do as much (or more) to insure loan performance

  2. Mark Brian

    May 17, 2013 at 12:19 pm

    Disappointed by the lack of cuss words in this article but I agree none the less! The phrase “zero underwriting loan programs” is so very very true. Not that the banks or Washington will ever admit this.

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