The Ironic Origin of 0 Down Home Loans

0 down home loans are now synonymous with two negative phenomenons: lame get rich quick schemes and the sub-prime lending crisis. But did you know that they were originally devised as an investing mechanism for the wealthy?

0 down home loans were originally conceived by lenders to empower wealthy investors to expand their portfolio of properties without having to liquidate their existing investments. This worked well in the early nineties and helped real estate investments to flourish.

Today 0 down home loans are associated with the housing crisis and foreclosures. How did it get there from a simple mechanism to help the wealthy invest more?

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Soon after 0 down loans flourished among the wealthy and increased profits for banks and lenders, some clever folks exploited this new mortgage loophole to develop the idea of a no money down mortgage loan as part of a "get-rich-quick" scheme. The basic idea was to empower people who didn't have the cash up front to benefit from the possible returns on real estate investment. And for a short period this actually worked, as long as people actually had some capital to really work with and treated the real estate investments like serious and professional endeavors.

So at this point the banks and lending companies were making a killing through the expanded number of individuals to whom they could sell home loans. They took this expanded base of loan customers and wondered how they could expand it even further.

So they got even more greedy and developed programs to provide no money down programs to individuals just trying to buy a home without having the traditional and necessary down payment. This was the steep slope that helped usher in the housing market crash.

The problem with taking it to this point is that it involved a gamble. They knew individuals who had too little savings to afford a down payment and a lesser credit score were a risk to default on their loan. However, lenders and banks gambled on real estate continuing to rise rapidly. They believed that even if their customers defaulted on their loans, they could still foreclose and sell the property at a profit.

Unfortunately for them, the real estate bubble burst around the same time the unemployment rate began soaring. Plateauing or even declining property values mixed with increasing unemployment to create a lender crisis unparalleled in modern economic history. At the height of the sub-prime lending crisis, more than 50 percent of all foreclosures involved 0 down home loans. Hopefully this makes you think twice before pursuing these sketchy mortgages.

And it all began with lenders just trying to help the wealthy further invest their capital without liquidating their assets.

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