Mortgage Types to Approach with Caution

Most renters have one obstacle that's getting in their way of becoming home buyers - a down payment. These renters assume that they have to stay in their apartment because they can't afford that down payment; it's just too hard to save up each month.

There are many mortgage program types - some that require a traditional down payment of 20%; some that require as little as 3% or 5%; and some that don't even require a down payment at all.

But are "no down" loans right for everyone? What are the risks involved with taking a home loan and not putting down anything in advance?

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Few people can put down 20% on a loan, especially when you consider the high price of purchasing a home now days. But it may be surprising to realize that in a research survey conducted by the National Association of Realtors, almost half of the research sample (7500 buyers), were financing their home loans with no down payment.

Of course, there are some risks associated with this type of loan. And new buyers may not be getting all the information they need about the risks of these loans. Before you consider taking a "no down" loan, carefully weigh the risks and make sure this loan is right for you.

While this loan sounds like a great alternative, you must realize that it is possible to get in a very precarious position - owning a home with a mortgage amount that is greater than the actual home's value. How can this happen? It seems like a bank would never allow you to borrow more for a home than the home's original value, right?

To a degree, that's true. Banks and other financial institutions will protect their investment by only financing the true value of the home. Unfortunately, there are some conditions that affect the value of the housing market.

First, realize that the real estate market is always in flux. Some markets are red hot, with high prices, some markets have gradual and steady increases in price. Of course, there are a few markets where home prices have actually decreased in the last few years. There's no way to guarantee that a market will only increase.

Part of the influence on the real estate market is the economic condition of the city or community. When they are is doing well - lots of job growth, lots of new business and steady employment rates, house prices stay stable. But when communities are struggling, or there is increasing unemployment, home prices take a beating.

Another major influence on the economic market is corporate downsizing. As companies merge and eliminate redundant positions, or down size and send jobs overseas, it creates additional unemployment. Again, this can have a huge affect on community home prices.

Think carefully about your community, the economic conditions and your willingness to take on risk before you decide to use a no down home loan mortgage type. It's not always the right choice for everyone.

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