Brex, at least currently, isn’t the kind of card where you carry a balance. Instead they look at your bank account and say “you have a million dollars in there, you can spend 100K this month” (not real numbers). You pay it all back at the end of the month.
So while not immune from risk, it’s considerably less risky, and works over a shorter time frame, than other credit options.
Zero down payment isn't even legal in Canada and anything less than 20% down and you must purchase mortgage insurance. I'm amazed that 0% is allowed in the US after 2008.
Mortgage insurance is required for nearly all sub 20% down mortgages in the US too. Most banks won’t do straight 0% down either, but will do ~3%. A notable exception to both of the above are VA loans, which will finance 100% with no PMI, but VA loans are only available to a very small segment of the population.
3% is typically only available for a primary residence if you haven't owned in the past X years. Otherwise, it's pretty much impossible to find anything less than 5% down.
That's not a terrible thing either. If you are not able to save up for 5 or more % down, odds are good you will be house-rich and money-poor, which can really suck a lot of enjoyment out of owning a home.
Say, for example: a $300k home with a 285k mortgage will work out to around $2,000 per month. Add in a vehicle payment or two, maybe a higher bill if you have high property taxes, phone, internet, paying down credit cards, whatever, and you're easily in the 3-4k per month just in bills. If you can afford that and not feel financially constricted, then you can afford to wait a bit, get more saved up to put more down, and you'll have more available for vacations, repairs, additions, appliances, etc.
3% should be outlawed. If you sell your house for exactly the price you paid for it, you would have just lost at least 6% to realtor costs. Even more when you consider expenses like title insurance, taxes, and other fees.
Anything less than 10% is insane, and less than 20% means you can’t afford it.
Jumbo loans have no such requirement in the US (anything over 650ish-thousand dollars).
Instead of Private Mortgage Insurance, the banks (typically?) require that you have a certain amount of cash in the bank as reserves. x% cash, y% investments discounted at 30%, z% retirement discounted at 40%, and so on. More at 10% than at 20%. And so on. But I don't think these are required; there's no reason a bank couldn't just decide to let you go without. And while they require pretty extensive documentation, you can still game the system.
When we bought (2015), interest rates for jumbo loans were LOWER than confirming loans, and no PMI requirement. win/win.
Zerodown is a combination lease and option to purchase. You're technically a renter for two to five years, just with a fixed cost for eventually purchasing a specific house.
All they have to do is bundle these mortgages together with safer ones and sell the resulting bundle as a security. The market will accurately assess the risk of the combined product and set prices accordingly. Because of the way this spreads out risk and incentivizes smart, objective analysis of the products, this is guaranteed to work well.
The default risk must be uncorrelated though or else you get no gains from diversification. This was a big part of how CDOs justified the security of a AAA tranche, when in reality everything was correlated because bad loans were made to everyone.
There's a roughly 3.6% spread between the purchase price appreciation schedule and purchase credit schedule, no option to extend the lease past five years, and a two-year minimum for accumulating leasing fees. This points pretty strongly towards partnering with a "hard money" lender willing to put up balloon loans and happy to collect either the above-market-rate interest or the property in lieu of repayment. It's likely arbitraged so that 100% of the risk gets offloaded. The appreciation schedule on the purchase option pays for the excessive interest demanded by lenders happy to take possession of property in downturns.
Furthermore, Zerodown is structured so that it will never go through the foreclosure process. They own the property and lease it out, so the worst they'll need to do is an eviction.
Much higher interest rates presumably. I don't think there's any fundamental reason why you shouldn't be able to buy a house without a deposit. A deposit just shows you can be sensible with money, and therefore the loan is much lower risk for the bank.
But if a bank is willing to take on the high risk in return for very high interest rates there's no particular reason why it shouldn't be possible. It may end up being exploitative, like payday loans, but not necessarily.
> A deposit just shows you can be sensible with money, and therefore the loan is much lower risk for the bank.
Is is lower risk, but it's not because it's some weird moral test.
The reason is that the lender only loses money once the value of the house has declined by the amount of the deposit. Say you buy a house with 20% down. If you sell the house at 80% of the value, you've wiped out your deposit but the bank loses nothing.
On the flip side if the house goes up and you sell for 120% you've doubled your money, but the bank isn't any better off.
Credit ratings are an attempt to turn weird moral tests into a concrete number, and they have a massive effect on one’s ability to get a mortgage. It wouldn’t be at all surprising for a bank to try to account for factors the credit score misses.
Well, yes, the down payment does reduce the bank's loss in some cases, but it does also function as a "moral test" in the sense the parent meant.
Every mortgage application asks if someone else is contributing to the down payment. That wouldn't matter unless there were a difference in risk classes between the two groups of people, so it's not purely a matter of a better loan-to-(initial-)value ratio.
Edit: looks like that's not the (dominant) reason; see follow up thread.
> Well, yes, the down payment does reduce the bank's loss in some cases, but it does also functional as a "moral test" in the sense the parent meant.
> Every mortgage application asks if someone else is contributing to the down payment. That wouldn't matter unless there were a difference in risk classes between the two groups of people, so it's not purely a matter of a better loan-to-(initial-)value ratio.
Don't they ask if someone is contributing to the down payment because it could be categorized as a loan that would factor into your income to debt ratio?
I just googled the issues related to mortgage downpayment gifts, and it looks like you're correct. This is the best summary of issues I've found and it doesn't mention anything about being higher risk in and of itself:
From that page, the bank wants to make sure it's not a loan or a side-payment from one of the parties to the transaction.
Still, I'd be really, really surprised if there weren't a correlation between "fraction of DP as gift" and "default rate", but I don't have anything concrete to cite ATM.
My argument is that zero-percent down loans will always end badly, because if you don't have the discipline to pull together even a measly 5%, you don't have the discipline required for home-ownership. And it's not like banks can charge payday-loan like rates on a mortgage, because if you can't afford a small down payment you also can't afford high monthly rates.
These types of loans always increase when credit is cheap, and then they end badly (sometimes very badly) when the economy eventually turns.
Those are good points (and I said something similar in my cousin comment), but you're overstating it by saying they always end badly. Obviously, some percentage of such mortgages are paid back. (I'd agree if you meant they go bad at the macroeconomic level, but you specifically clarified that you were referring to the individual who can't make a down payment and saying they will also fail to pay it back.)
Yes, you are correct, I'm not arguing every single mortgage will end in default, but that every macro environment where zero down mortgages proliferate will always end in tears to whoever is left holding the bag (currently homeowners and investors, and, crucially, rarely loan originators).
Of course, to my knowledge, the only environment where zero down mortgages were really widespread was the mid-aughts housing bubble, but even with an n of 1 I still think it's a bad omen.
It would be quite something if tech and not banks caused the next great recession.