It's a lot easier to list lenders that don't offer zero-down home loans than those who do these days.

That's especially true after federally-chartered investor Freddie Mac recently introduced its Freddie Mac 100 including plans to buy qualifying zero-down conforming loans.

But Freddie Mac's late move in the market could be risky for both its investors and consumers just now pulling up to the nothing-down table.

Nothing-down loans open doors for young buyers, low-income buyers, singles, first-timers and other income-rich -- but cash-poor -- buyers. In a fast appreciating market, the no-dough loans also give more buyers a shot at quickly accumulating equity.

"I think the 100-percent loans have their place. They have helped consumers get into houses when they otherwise would have been priced out of the market as prices continue to rise," said Forrest Campbell, of Monterey Bay Mortgage in Capitola, CA.

The loans are, however, riskier than loans with down payments in any market.

Today's breed of zero-down loans are particularly risky because they were largely spawned by an economy that no longer exists. In a booming economy that appeared to know no bounds, lenders likewise stretched lending risks.

Now, a recession may or may not be in the cards, but the nation's longest economic expansion on record has given way to tens of thousands of layoffs across numerous economic sectors from manufacturing to high-tech.

Get caught with a zero-down loan and no new job to jump to and you could be in particularly dire straits -- responsible for housing costs greater than your home's value, which could sink in some markets.

"What happens if you lose your job and you have to put your home on the market? You've got a six percent commission to pay plus selling costs. You are up to 8 to 10 percent in transaction costs and you don't have any equity. What are you going to do?" asked Bruce Hahn, president of the American Homeowners Association..

At the onset, nothing-down loans are more expensive than those with down payments. The interest rates and points or both are typically higher and there are additional costs.

"Borrowers have to pay a higher rate or private mortgage insurance (or both) to do the zero down, so many borrowers wind up with 3 percent or 5 percent down to get better rates," says Warren Myer of Myers Internet Services, Inc. a San Jose, CA-based mortgage Web site developing, consulting and marketing firm.

Try to leave the table early, say to cash in on lower interest rates to save both your credit and your home in a falling economy, and you could face a penalty as stiff as three percent of the loan balance.

"Just like anyone who transfers their equity for cash by incurring more debt, there are risks if you can't sell your home at a price that will pay off your new debt," said Campbell.

And remember those portfolio-backed, zero-down loans just a few years old?

The product of a once bullish Wall Street, the loans allowed you to avoid cashing in your stocks (and temporarily side step capital gains taxes) to come up with a down payment. In lieu of a down payment, one loan required you to hold securities valued at about 40 percent of the home's appraised value.

If your portfolio's value slipped -- especially if you loaded up on tech stocks -- you've been sweating a stomach spinning scramble to come up with enough rock solid stock collateral to make up the difference.

Some borrowers wish they had zero memory of such loans.

For more articles by Broderick Perkins, please press here.

Published: February 22, 2001

Use of this article without permission is a violation of federal copyright laws.

Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.