One of the biggest U.S. lenders is offering 0%-down-payment mortgages for first-time home buyers. Here's the catch.

By Aarthi Swaminathan

Prospective home buyers should fully understand the terms of a 'silent' second mortgage before taking one on, expert says

Home buyers will be able to buy a home without putting any money down under a new program launched by United Wholesale Mortgage, one of the largest U.S. mortgage lenders.

The Pontiac, Mich.-based company's new program will be available to first-time home buyers and people earning at or below 80% of an area's median income, the company said in a press release.

UWM (UWMC) will give eligible buyers a second-lien loan of up to $15,000, in the form of down-payment assistance, for 3% of the home's purchase price. The loan will not accrue interest or require a monthly payment.

Buyers can also choose when and how often they want to make payments on that second loan, which must be paid in full by the end of the loan term if the first mortgage is paid off or if the borrower refinances the mortgage, UWM said.

"Homeownership is something we're very passionate about," Melinda Wilner, chief operating officer at UWM, told MarketWatch.

The company had previously allowed buyers to put down as little as 1% on their homes, but it wanted to go further to help home buyers, she said. The lender is anticipating a higher volume of borrowers with its new zero-down program, Wilner added.

Poor underwriting practices were a key driver of the subprime-mortgage crisis in the U.S., the International Monetary Fund wrote in 2008. But unlike the low- and no-down-payment loans that proliferated during that time - when lenders made loans to people who eventually were unable to pay them and lost their homes - UWM's program is different, Wilner said.

"It is such a different time now than it was back then," she said. "Underwriting guidelines are very, very different now than they were in 2006 and 2008 ... and last time, we had a whole lot of oversupply of houses. ... Now, demand is way heavy, compared to the supply that's out there."

Even the federal government acknowledges the steep hurdle that down payments pose to aspiring homeowners. President Joe Biden, during his State of the Union address, called on Congress to provide up to $25,000 in down-payment assistance to first-generation home buyers.

What to know before taking on a 'silent second mortgage'

UWM's program is similar to down-payment assistance programs at the state and local levels, so "this isn't a new concept," according to Wilner.

But it's important that home buyers fully understand the terms of the loan they are taking on before signing any documents, one expert said.

"The aspect of this program that makes me nervous is the silent second mortgage," Anneliese Lederer, senior policy counsel at the nonprofit Center for Responsible Lending, told MarketWatch in an interview. "It's great that there's no interest on it, but it's a balloon payment, and borrowers need to understand what a balloon payment is."

A balloon payment refers to a bigger-than-usual one-time payment that is required by the lender at the end of the loan term, according to the Consumer Financial Protection Bureau.

On its website, UWM states in the fine print at the bottom of the page that the second loan "has no minimum monthly payment requirements, a term of 360 months and is fully due as a balloon payment upon the occurrence of either a refinance of the [first mortgage], [or] payoff of the [first mortgage] or the final payment."

"So there are three points in time [when] this payment is due," Lederer noted: When a person refinances, pays the mortgage off or sells the house. If a homeowner is prepared for these circumstances, there is no issue at play - but "if you don't have a plan, it can result in foreclosure on the house," she warned.

One way borrowers can avoid this scenario is by speaking to a housing counselor prior to applying for such a mortgage, Lederer said.

Gaining a 'foothold' in homeownership

The typical first-time home buyer puts down 8%, according to the National Association of Realtors. In the first quarter of 2024, the typical home buyer put down $26,000, Realtor.com said in a recent report.

(Realtor.com is operated by News Corp subsidiary Move Inc. MarketWatch publisher Dow Jones is also a subsidiary of News Corp.)

To be sure, buyers today can put down as little as 0% through programs run by their local governments. For instance, first-generation home buyers in New Jersey can receive assistance of up to $22,000 toward their home purchase through the New Jersey Housing and Mortgage Finance Agency. The second loan is interest-free and forgivable after five years, with no monthly payment, but also comes with income and purchase limits and other requirements.

UWM does not state in its terms whether the loan is, like government-assistance programs, eventually forgiven, CRL's Lederer noted.

Other financial institutions, such as Bank of America (BAC), also offer a zero-down plan for home buyers in certain communities.

"The concept of getting help with a down payment is not a new one," Wilner said, but "this program really simplifies it for everybody - for the broker and for the consumer." Different entities that offer assistance have their own products, lenders, guidelines and requirements, she added.

And the array of down-payment assistance programs and their guidelines can be hard to keep straight. Freddie Mac acknowledged that challenge last year in launching a program to help lenders and home buyers navigate such programs more easily.

The UWM program comes as the housing market remains bogged down by high interest rates, which are sapping home-buying demand as well as keeping a lid on housing inventory. With mortgage rates over 7%, current homeowners - many of whom have rates of less than 4% - have little incentive to sell their home and enter a bidding war to buy another.

Read more: 'What's the f-ing point': With homes selling for $400,000 over asking, bidding wars are pushing buyers to the breaking point

Housing activity is expected to slow in 2024, Fannie Mae said in a forecast published in May, as mortgage rates are expected to end the year averaging 7%. The government-sponsored enterprise expects the 30-year mortgage rate to average 6.7% in 2025. That would push existing-home sales down to a 4.19 million pace, Fannie Mae said - which, as seen in the chart below, is considerably lower than before and during the pandemic.

In 2022, UWM was the second-largest company in terms of how many mortgages it originated, according to a recent CFPB report.

With UWM's zero-down program, the first mortgage will still be resold to government-sponsored enterprises, while the second-lien loan will be held by UWM, Wilner said.

The program is ultimately "really good" for people who can swap their rent for a mortgage and make those monthly payments comfortably, Lederer said, because "it can be the foothold that you need to get into homeownership."

While such programs "have the potential to really open up homeownership," Lederer added, they can also be a major issue down the line for home buyers who don't understand what, exactly, they are getting into.

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-Aarthi Swaminathan

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05-25-24 1004ET

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