The other day, Megan, who I frequently bore with real estate talk, highlighted a new program run by several state housing agencies and Fannie Mae that lets people buy a house with as little as $1,000 down. Less, actually: the couple she cited put down 67 cents. This is obviously scandalous, and sure to end badly for many of these "lucky" buyers if the economy worsens and house prices keep dropping. (Though it's not quite as bad as the Australian banks offering 105 percent mortgages to first-time home buyers.)
But the risk you often hear about--of winding up underwater and defaulting on a loan--doesn't fully capture the danger inherent in low- or no-money-down government programs like this one, and especially the broadly popular FHA loans that only require 3.5 percent down.
I recently got a glimpse into this when we sold our house. Never having sold a house before, I hadn't realized that written offers lay out the entire financial lives of prospective buyers--credit scores, bank accounts, tax returns, etc. One of the two we got was from a 40-ish couple with an FHA loan. Insanely, to my mind, they had cashed out large chunks of their retirement accounts, and paid a penalty to do so, to fund their down payment. This was allowable under FHA rules. We didn't sell to them (FHA loans are lousy for sellers), which I consider an act of mercy. But if we had, and they'd defaulted, not only would their credit and housing situation be shot, so would their retirement prospects. In fact, they'd have harmed those prospects just by buying the house.
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