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Are mortgages with no down payment making a comeback?

Think no-down-payment mortgages are dead because of the housing crisis? Think again. The Affordable Advantage program run by Fannie Mae has allowed some home buyers to purchase a property with only $1,000 as a down payment. The mortgage loan program helps people with moderate incomes purchase homes, and housing grants can be applied toward the down payment.

Four states pilot mortgage program

Only four states are offering the mortgage loan program at this point: Idaho, Massachusetts, Minnesota, and Wisconsin. An article in the New York Times says the Wisconsin Housing and Economic Development Authority has issued 500 loans since March.

While it may seem risky to issue mortgages with low down payments, some housing experts seem to believe that the program’s requirements can cut the risk of homeowners defaulting. Only 30-year fixed-rate mortgages are available through the Affordable Advantage program. Risky adjustable-rate mortgage loans are not available.

Verifying borrower information

Homebuyers must have a credit score of at least 680 and live in the home purchased. Mortgage lenders also must verify the income and assets of home buyers, something that did not always occur before the housing crisis and contributed to a surge in sub-prime lending.

“In addition, we want to see what other lines of credit people have, and their performance. We look at their work history. We call their employers,” Kate Venne, spokesperson for the Wisconsin HFA, told the Washington Independent. The program helps borrowers if they become unemployed. Also, there is no requirement for mortgage insurance, which can bump up monthly fees.

Should you apply for a home loan?

If you live in one of the four states and are wondering whether or not to apply for a home mortgage through the program, here are some things to consider:

  • Are you really ready to take on mortgage payments and other expenses associated with home ownership? In addition to principal and interest, you need cash to cover homeowners insurance, property taxes, utilities, routine maintenance, and home repairs.
  • Would you rather save up a larger down payment to lower your monthly housing costs? Remember, the larger your down payment, the lower your monthly mortgage costs.
  • Do you need to clean up your credit to qualify for a home loan through the Fannie Mae program? Being on time with bill payments, reducing debt, and deleting outdated information in a credit report can help raise your credit score.

Finally, consider whether you are willing to buy a home in this economy. Housing prices and mortgage rates are low, making it a good time to buy a home. But home values could continue to fall even after you purchase a property. Honestly assess your tolerance for risk, as well as your commitment to staying in a home that could decline in value if the economy doesn’t improve.

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