Major U.S. lender introduces zero-down mortgage: lifeline or red flag?

One of the nation's largest lenders is rolling out a zero-down mortgage for first-time homebuyers, but some critics are urging caution.

United Wholesale Mortgage (UWM)’s "0% Down Purchase" mortgage provides a second lien loan covering 3% of the home's purchase price, up to $15,000. There's no interest or monthly payments.

The full balance is due either at the end of the loan term, during refinance, or when the first lien loan (the mortgage itself) is paid off. Buyers can also choose to pay it off as they go, but it’s not a requirement.

“Thousands of borrowers are sitting on the sidelines because they don’t have a downpayment – this program removes that barrier,” said Mat Ishbia, president and CEO at UWM.

To qualify, borrowers must earn less than 80% of the median income for the area where they are buying. Those with very low incomes, less than 50% of the median income, will receive a $2,500 credit that reduces their debt and does not need to be repaid.

Additionally, borrowers need a credit score of 620 or higher, and the loan must cover 95% to 97% of the home’s value.

Buyer beware of the balloon payment

UWM's zero-down program is a balloon payment: a large, lump-sum payment due at the end of the loan term.

Think of it like a balloon that inflates over time: it seems manageable at first, but if you're not prepared when it’s time for it to pop, the consequences can be severe.

According to the Consumer Financial Protection Bureau (CFPB), balloon payments can be a huge financial burden if you’re not ready with cash at the end of the term.

If the property value falls and your financial situation changes, it could be difficult to refinance or sell the home to meet the balloon payment.

Critics are concerned buyers may not be aware of these risks.

"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.

"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."

Is anyone else getting deja vu circa 2007?

Low to no-downpayment mortgage options gave us the 2007 subprime mortgage crisis, so it's not surprising that UWM is addressing concerns about its zero-down program.

Melinda Wilner, chief operating officer at UWM, told MarketWatch, "it's such a different time now than it was back then.”

"Underwriting guidelines are very, very different now than they were in 2006 and 2008 ... and bow, demand is way heavy, compared to the supply that's out there,” she said.

Today's tighter housing supply helps prevent a repeat of the subprime crisis by maintaining higher demand and more stringent loan requirements. Those supply issues persist while homeowners hold a death grip on their lower interest rates.

At the same time, it appears the housing affordability crisis isn’t getting any better, at least not yet. Creditnews research found in 41 out of 100 U.S. metros, would-be buyers require a gross annual income of at least $100,000 to qualify for an average home.

UWM’s CEO is saying its zero-down program is “going to change the game this purchase season.” A lot of Americans are hoping he’s right.