Back in the heyday of the mortgage boom, lenders eliminated many of the so-called “barriers” to home-ownership, such as the requirement that buyers make a downpayment on their homes. This was a great way to juice the market for homes and mortgages, but it also turned out to be a great way to encourage defaults. In fact, the practice of eliminating down-payments seemed so closely linked to mortgage defaults that Congress outlawed one version of it.
Now the federal government is bringing back the days of 0% down. From Business Week:
Buyers who haven’t owned a home for three years or longer are eligible for an $8,000 tax credit, thanks to a provision in this winter’s stimulus package. Now, under a little-noticed program announced May 29, the Federal Housing Administration will steer the funds to cover closing costs directly—in some cases even offsetting the 3.5% minimum down payment FHA loans require. That’s enough to cover most or all of the down payment and fees for homes up to the U.S. median price, now about $169,000.
Officials hope “monetizing” the tax credit will help revive the housing market, because meeting closing costs is one of the biggest hurdles for new home buyers. The National Association of Home Builders predicts it will add 40,000 to the 160,000 sales originally expected to be spurred by the tax credit. Supporters say the move avoids the worst effects of seller financing, in that the credit is essentially the buyer’s money, and government assistance doesn’t give sellers a perverse incentive to inflate prices in an unsustainable manner.
What could go wrong?
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.