The Truth About “No Money Down” Mortgages (Ep. 260)

"Young people are hearing stuff on social media. What they're not hearing is the other side of it. Don't just get wrapped up into, oh, everybody on social media is saying buy a house, or everybody I follow is buying a house to arbitrage it or to do whatever with it and rent it out. No, it's all going to be glorious. Well, you can't just listen to people blow smoke up your skirt. You also have to have the reality of that, and punch your numbers and understand your numbers and all that stuff. My advice would be to get a realtor that understands the income potential of a property, or a realtor that actually invests themselves — not just a realtor that's selling a home, because there's a difference there."

Hello, hello, hello, and welcome back to the podcast. Thank you very much for being here. Today we've got Teresa back, outside of the studio. So this is exciting. We haven't gotten to do a podcast together in a while.

I know, I'm excited. It feels good. What a good way to start the year off.

Yeah. All right. Today we're going to talk about something not necessarily infinite banking related, but I'm talking to a few clients that are young that are trying to get houses. And we've got some FYI mortgage advice so that you don't get stuck with a mortgage, or a loan mortgage, you may not understand. Well, I guess a loan mortgage is the same thing. Oh my gosh.

It's Monday morning, people. Mary Jo and I both needed some additional go-go juice today.

Yeah. We're both on our second cup of coffee.

So, Teresa, I had two clients in particular — two potential clients — that were in their 20s, and they were both ready to go buy a home, and they didn't have any money. And I said, so where's your down payment? They're like, oh, I don't need any down payment. And one of them said, well, the bank actually just called me before I talked to you and said that I've been approved. And I said, for what? How does the loan work? Do you understand how those loans work? And so you and I talked about it, and you actually had one of these loans.

I did, yes. So it's down payment assistance, but I didn't fully understand this at the time — it's repayment assistance.

I don't mean to cut you off, but keyword: assistance.

Yeah, keyword assistance. Yes, I was assisted. I think I only paid like two to $3,000 in total to get into my home. But I may not have fully understood the extent of what I was doing at the time. I did have savings, but I was using those savings to start my business.

But we got people without savings over here. Yes, so let's forget about Teresa's savings. Let's not talk about her savings, because most people don't have savings. And if they do, it's just like $1,000 or $2,000.

Well, and I would say that that's definitely a good thing to have if you're thinking about purchasing a home, because a lot of people don't think about housing repairs, right? Like, even if you're purchasing a home warranty, that could be like $500 to $1,000 for the year. And that doesn't count the service fees that you have when you have someone come to your house, which are usually like $65, $75. But yeah, I didn't fully understand how that program worked at the time. I don't think I would have done anything differently still knowing, but it is good to know this information, because it might help you make different decisions.

So it's essentially recorded as a second lien against your property that usually gets forgiven over time. So there's different down payment assistance programs. Some of them you have to make monthly installment payments on, in addition to your mortgage. And then some are payment-free and then they're forgiven after — I think mine was forgiven after three years total. And I actually ended up selling my house within, I think, two years of owning it. So I had to pay back that additional — I think it was like $3,000 at the time.

Which we were kind of having this conversation. I think it's good for people to know. You're like, well, that was a different environment. So can you kind of walk people through why that makes a difference in this kind of mortgage environment, versus like in 2019 when things were really great and equity was kind of through the roof?

Well, I wanna break it down even further though, because people don't even understand what that assistance piece is.

Oh, like the lien?

So let's just use round numbers. If I'm gonna buy a $100,000 house, typically for a traditional mortgage you need 20% down. So that means you're coming up with $20,000, okay? If you're gonna get into one of these loans where you don't need any money down, and they don't tell you it's an assistance program — right, you just don't need any money down, Tris, so let me get you in a house. And so you put your $2,000 down, or you put nothing down. What's happening is, the assistance part is they are lending you the $20,000. And if you sell before five years, you have to pay that all back, okay?

So like you were saying, there's maybe a separate — it's like a second lien and it's a separate payment. Is that what you're saying? Some of those are separate?

Some of them are separate payments. It depends on what type of program you use. For mine, I didn't have a separate payment. It just was forgiven. A certain portion was forgiven every single month I lived in the home.

Okay. So my son had one of these. So he just made his regular payment. But he wasn't in his home five years either. So now all of a sudden, you don't have that much equity, because whatever the equity is minus what you owe them. So let's say that you're only $10,000 into paying them off. So now you sell your home and they're gonna take $10,000 of that equity to get themselves paid off. They lent you that 20%.

So the two people that I talked to knew that they were not staying where they're at for five years. I'm like, and why are we buying a home? If you're not gonna have that mortgage, why are we buying a home? And then that led to the conversation that you and I had about — this isn't 10 years ago. This isn't five years ago, when interest rates were 2% and the housing was just going crazy, right? I feel like we've kind of come stagnant, or it's kind of just holding its own. Like, maybe we have a little bit. But if we're in a rural area, now all of a sudden, who's living there? Nobody. So now our housing market is not going like this.

Yes. Or maybe we are in a place like you, and we're in, you know, the Phoenix area, let's say. And so we're in Phoenix, and maybe the housing market — is the housing market doing this in Phoenix, or is it just slowly creeping?

Not anymore. As we all know, I love looking at real estate. Like, I go on Redfin just for fun, just to see what the housing prices are. And there was actually a house across the street from ours that was on the market for like forever. And I was like, they have this price way too high. And they ended up dropping it. And this is because I'm nosy, but I looked up what they paid for it. And they had to actually drop it below what they purchased it for, just to get out of their mortgage.

And I think, to your point, it's really good for people to think about if they want to stay somewhere for a certain amount of time, because it is actually cheaper to rent than it is to buy. So unless you're house hacking, or you're getting a duplex, or finding some way to mitigate your monthly expenses, it might make more sense to rent if you don't see yourself there long-term — especially if you're in a situation where you don't have savings.

Here's the thing. If you don't have savings, when you go to sell the house, if you're selling it for the same as what you purchased it, you don't have the equity to pay them back on this loan.

Well, you lose money.

But in order to get out of it, you're going to have to pay them. Yeah. So you're not going from a house and you're not going up.

Yes. You're actually either going to go level, or you're going to go down if the market in your area is not going up. So those loans maybe worked way back when. But if they continue to give these loans to people that don't understand they're being assisted — I didn't know that was the word — they don't know that they're actually lending them the money.

Because on top of that, you're also paying PMI. So you have mortgage insurance, that because you don't have 20% equity in your home, the lender says you're giving us a monthly amount. That's to us. It doesn't go to your principal. It doesn't go to your loan. It just goes to them as insurance that you're going to be good for that, or that they can basically take the house. I don't really know how it works on their end. Ask your mortgage lender.

But at the end of the day, you have to pay PMI. And that's just in addition to your principal and interest payment. You're going to pay principal and interest, and then it could be another $250 a month just for PMI. That is gone. That's like paying lot rent in a trailer park. Okay? $250 a month. It's like paying rent in an apartment building. $250 a month, gone to the lender.

Now, some of those loans, I do know, as soon as you reach the 20% equity, the PMI drops off. Some of them are for the life of the loan. So you really have to pay attention. Like an FHA loan years ago, I was told the PMI never drops off. It goes for 40 years. And the only way to get it to drop off is to refinance that house. And then you have to have another appraisal. You have to have closing costs. You have to have all these things that go along with it — administration fees, whatever. Not closing costs probably, but administration fees.

So you really have to do your due diligence and education. We are not mortgage experts, like, by any stretch of the imagination. But you know what? The socials are full of them.

There is one lady that I follow on social media. I don't know what her name is off the top of my head. She's on TikTok. She has really long brown hair. And she is constantly talking about mortgages, and she does lending. And just make sure that you find somebody that truly explains this to you. Because if they're not, then leave. It's like buying life insurance. If they're not going to show you exactly how it works, then go find somebody that will.

But you're in this thing, like, they're lending you money to buy a home that's not going to appreciate because you want a home. That's silly. You're better off renting in that scenario.

Yeah, that's such a good point. Especially because the pitfalls of that situation are, your payment is going to be higher than it would be comparatively if you're renting. Especially if you don't see yourselves in there for five years or more. I would say if you did, maybe it makes sense. But if you don't, then I don't know.

And not to mention, a lot of people don't — like, I didn't understand that it was recorded as a second loan against my property. You know, nothing is free. And I think people sometimes make the mistake of thinking, oh, this is a really good deal. And I was like, okay, well, how is it a good deal for the other person?

And because of the real estate environment that we're in right now, things are kind of stagnant. It's not like when I purchased my first home in 2019. And it was a new build, so I wasn't super worried about a lot of housing repairs. But a lot of people are in that same situation. Like, if you're purchasing an older home, yeah, there's going to be things that pop up. So I think it's really good, especially for young people, to ask those questions.

Because I think we're so incentivized by, you know, the American dream of homeownership. And although I don't disagree with that dream — I think it is worthwhile — how you do it is important. And thinking about it long term, just like any real financial decision, you should think about it long term, and what you want to get out of it for yourself, so that you don't put yourself in a situation where you're like, oh dang, I purchased this property, I need to sell it, but I didn't account for the agent commissions and I'm going to have to pay out the closing costs. I didn't account for the fact that my home didn't appreciate as fast as it has been over the past couple of years. So now I'm going to have to be like my neighbors across the street and pay money out of pocket to even get out of that house. Because if it rents cheaper than the mortgage payment, yeah, you're going to have a hard time renting that out.

So just thinking about those things long term, I think, is really good. And I wish that I had listened to a podcast before. I was like, oh, this is a great deal. And it was, for me — but it was because of the real estate environment. I just got lucky, I guess, is probably the better way to put it. And unfortunately, a lot of people, if you're signing up for these loans in this current real estate environment, I don't know if it's going to work out as well for you. And it's really good to ask yourself those questions, to make sure you're not putting yourself in a situation where you're going to have to owe money when you sell, you have a higher mortgage payment, you don't have the savings for any house repairs. That's going to put you kind of further behind than someone who's renting and saving money, honestly.

Well, if you don't have any money for a down payment — like both the people that I talked to, neither one of them had more than $2,000. And so you don't have more than $2,000. What happens if the fridge goes out? Or what happens if your furnace goes out? Or your AC unit? Or anything? Dishwasher? There's a lot of appliances. There's a lot of stuff that can go wrong, okay? And now all of a sudden you're sticking that on a credit card, and your house isn't appreciating. It really can be a recipe for disaster.

And so my solution — because we can sit here and talk about all the problems — but I look at it, and like I told both of my potential clients, I'm like, the solution is figure out how to save money. Like, are you going to the bar? Are you buying a vehicle that's more expensive? And both of mine happen to be blue-collar guys. So I'm like, are you doing custom rims and tires and exhaust and all the rednecky things that, you know, they're awesome, hey, I love them — but are they necessary? If we want a house, what can we give up? Or do we need to tighten our bootstraps?

Like the one, I said, so where's all your money going? Because he was still living at home. And I said, so where's all your money going? Is it beer? Is it your vehicle? And he's like, well, I just — gas station. He's like, I live on gas station food, because he traveled a lot, you know? And I said, let's hit the grocery store for some bread, mayo, some lunch meat, you know? Sandwich on the go.

Yeah, gas station food is super expensive.

Like, go buy some pop or whatever it is at Walmart, and the 12-pack. And it may sound crazy, but let's cut our expenses, or let's watch our money, so that when it does come time to get into a house, we have a little bit of equity in there. Or at least we have some — if you're going to do that mortgage, great. If you're going to be there five years, fantastic. If you're going to be there 15 years, great, do the mortgage. But at least you'll have some money so that you have the ability to fix something if it's wrong. Or, like you said, do some house hacking and have some buddies move in, or have some girlfriends move in or whatever, and charge them rent. There's ways to do it, but…

There are. You gotta be smart about it.

And you really truly need to understand, it's almost like a predatory loan, if you ask me. When my son did his loan, I said, do not go to that loan officer. You go to this person, because I know her, I like her, she's honest. Well, he didn't listen, because why would he? And so he went to the other person. And guess who I found out all this information from? The person I told him to go to. She's the one that said, oh, this is the kind of loan they gave him. And when he went to sell his house, I said, did you know this? Well, he had no idea until I told him. Then they had to call the bank and check into it.

And it worked great, and it was fantastic, and it got him in a house, and their house appreciated. So he was okay. But again, he sold right at the cusp of everything — just high interest rates and everything kind of just hitting the wall. And so, maybe you could buy now and interest rates go down and you're good, but I don't foresee that happening. I don't foresee interest rates coming down, at least not probably in the next four years.

Like, we know economically, all the people that you and I listen to, we know that interest rates should stay at about 5% for inflation to kind of stay where it needs to be. And they're seeing inflation. We still have inflation at 6% and 7% interest. So we can't bring it down to five, because we would have more inflation than we need. So they're not going to do anything until it really gets under control.

Also, I don't know if you knew this. I just learned this the other day — I don't know when this happened. There was some change, I don't even remember what it's called. There was some change that when the Fed changes their interest rate, it now does not directly affect the mortgage interest. The banks get to decide on their mortgage interest, and if they'd lower it or raise it.

Oh, interesting. When did that pass? Recently?

It was like maybe two years ago or something. I would have to Google it to see. But I don't follow interest rates on mortgages that much. So I just thought, well, isn't that interesting? Because before, it was directly — if the Fed lowered it, it automatically got lowered with everybody else. Well, now the banks have the ability to play games.

Right. They're going to decide their spread. They can increase their spread. They're always putting themselves in a position of control. They know what they're doing.

And I like all the pointers that you lay out for people so that they can consider if it's the right type of a loan product for them. And I will say, if you can either mitigate your expense for housing, or cash flow, or whatever — I was thinking back to when I went into that loan. I think at the time I was paying like $500 a month for rent, which is like nothing these days. And so when I got into that home loan, I was also house hacking, because I was renting a room to my brother. And then I was also living with my boyfriend at the time, who is now my husband, but he was paying me rent. And my monthly rent payment — or I guess mortgage payment at that time — for me was the same. So it wasn't like I was getting into this payment of, like, oh, I want to be a homeowner, but also I'm going to quadruple or triple what I'm paying monthly for housing.

It was a level trade.

Yeah, exactly. So if that's a helpful framework for people to think about — it's like, if it doesn't make financial sense, then don't do it. And I would say that goes for everything.

But here's something else to know. Some of those loans don't allow you to house hack and rent out rooms.

Oh, really?

So if they were to find out that you were renting something out, that's not going to be okay either. So you really need to make sure that you know what all the rules are. Now, I suppose if you're renting to your brother and you don't create an LLC for that and whatever, you're probably okay. They're not going to find out. But you should probably know all your rules before you go in.

That's a good point. I mean, that was like young 20s Teresa. So she was a little dumber than the version you're getting today.

Here's the other thing that I find — and you guys probably don't have so much of that problem, because you don't have grass down there. But here, when you buy a house, right, you need a lawnmower, and you need sprinklers, and you need hoses, and you need things to take care of that property. And so you're going to need to buy light bulbs, and you're going to need batteries for things. And all of those things add up, and they're in a budget that you never had before.

Scott and I have found that when we moved from town to two acres — oh my God, all of a sudden we needed a tractor, and we needed a snowblower, and then we needed a different kind of snowblower because it was too hard to use the manual one. And then, because we started with a blade and that didn't push snow, then you needed a snowblower. And then we moved to 40 acres, we needed a bigger tractor. And then you got your side-by-sides and all — not that you need those, but we got one.

So all these extra things that you add as your property gets bigger. When you're in an apartment, you literally need batteries for your remote. You technically don't have to worry about a light bulb in the fridge, a light bulb in the stove, minor things like that. You could be like, hey, the light bulb went out, and they would have to provide you a new light bulb. Now, you would be a horrible tenant if you did that, okay? Let me just clarify, like, nobody would want you as a… Don't be that person.

I fixed everything in my apartment when it went wrong, because I just didn't want to have to wait for anybody.

But still, you have these other things that you would have not anticipated having. So yes, it's great, it's yours, but you're also paying a lot of interest, because you're not paying interest on 80% of that mortgage — you're paying interest on 100, plus PMI. So make sure you're smart about it.

This morning when I was eating my breakfast, I was on TikTok, and there was a guy doing a TikTok live about credit cards, and which is the best one, and points, and all the things. And I was like, man, this is super beneficial information. And so those people are out there that you can ask questions of. They have free material on their website. Just be super diligent about making a smart decision, and not just listening to somebody in your family that says, oh, you should buy a house. If they don't know the housing market and they don't know mortgages, probably not the person to be listened to.

Absolutely. I think, honestly, just taking a long-term view of what you're wanting to do usually helps mitigate a lot of decisions that are made with more short-term thinking. And I think — what is it, the statistic that people don't even stay in their house? I think it's less than 10 years. Or is it seven? Is it like every five or seven?

Yeah, people move every five or seven years.

And that's another thing I wanted to bring up, actually, is that when you think about your mortgage payment, the most amount of money is going to the interest portion. So it's like, if you don't have any equity in that property and you're making your payments every single month, I mean, it could be like a year later and maybe you've paid less than $5,000 towards the principal. So again, the bank is in control. They're going to make their money up front. So those five to seven years are very lucrative for them. You truly aren't building equity.

Well, exactly. And that's my point. It's like, if you're not in an appreciating environment, your loan payment is going down so slowly that it really does make it hard to make a profit, unless you're in a crazy area where a lot of growth is happening and it is appreciating like that. But like we said, most of the real estate market is pretty kind of slow right now, because interest rates are so high. So just don't put yourself in a position where you're over-leveraged, or you can't afford the payment, or it doesn't make financial sense.

And ask yourself — your five-year-older self — does this still make sense? Am I still glad that I made this decision? So I think it's a really good podcast to listen to, especially as a young person, because the average age for the homeowner now is like what, 40, for a first-time homeowner? And I have a lot of thoughts about that too, but not for another podcast.

Yeah, I think the question is, how do we make sure that that's not you? And it's admirable, right, to be focusing on these things that allow you to add to your hard assets. I wouldn't discourage that thinking, but I think how that happens is important, and you don't want to put yourself in a situation where you're stuck.

Which is what a lot of young people are hearing stuff on social media. And so what they're not hearing is the other side of it. And so don't just get wrapped up into, oh, everybody on social media is saying buy a house, or everybody I follow is buying a house to arbitrage it or to do whatever with it and rent it out. No, it's all going to be glorious. Well, you can't just listen to people blow smoke up your skirt. You also have to have the reality of that, and punch your numbers and understand your numbers and all that stuff.

And my advice would be to get a realtor that understands the income potential of a property. Not just a realtor that's selling a home, because there's a difference there. And your realtor — I get they're not supposed to give financial advice, but they have seen things. Okay? And a realtor that's maybe been in the business for a long period of time. Not somebody that just got in when interest rates were low and they sold all these houses and they don't know what to expect. And if that realtor is new, how long have they been watching real estate?

So I think that you should probably be interviewing realtors as well, and not just taking the first realtor that comes up, because they may just be pushing you into something, and also not informing you of everything that you should be looking for.

Yeah. And I just did a podcast on — I don't know when it's going to air — the Farming Without the Bank podcast. I just talked about the misery of our condo sale and the entitlement mentality and how awful that was. And so if you guys want more information on how not to be a crappy buyer, go over there and listen to that. But yeah, I think that picking the right people and doing your due diligence, and just stop taking everybody's word for everything.

Yeah. Like, even look up all the stuff that we talked about. The more information that we give you — and if you just trust us, that's great, because I know we're trustworthy people. But not everybody is. And eventually you get caught with your pants down and you're like, oh, that was somebody else's fault, they pulled them down. No! You didn't even watch to see who was around you. Okay? You gotta pay attention. You have to watch your own back.

And to your point, I think some good questions to ask, in addition to making sure you have a good real estate agent, is look at it as an investor would look at it. What are the average days on market for a house to sell? So that if you did want to sell it, you would be like, okay, well, I know I would have to keep this for three months minimum. Average days on market. What's the average rental rate, to see when it cash flows if I decided to move out? I wish I had asked these questions before purchasing property, just in general, as my primary residence. So those are some helpful things to also look at, in addition to making sure your real estate agent knows what they're talking about.

And don't buy a house to save your marriage.

For the love of Pete. Like, who's doing that?

Oh, I hear that all the time. Like, oh, somebody is not happy because they want a bigger property. Well, when you get to the new property, that doesn't mean your marriage isn't going to end. And now you have no equity, and you didn't put a down payment down, and you have to sell. So you probably have to pay money out of pocket to do that.

Because eventually, that's not going to make a difference, right? I know a couple locally who built a house, and then they were stuck in their marriage because they built the house together. Well, a lot of other things happen in the meantime. But the moral of the story is, if you're not going to be there and things aren't going well now — a lot of houses have to sell and you're going to take a loss on them because of a divorce.

Like, if I buy a property — I'm as nosy as you are — so if I buy a property, I'm Googling, man. I want to know what's happening with those people. Are we in a divorce? Because if it's a divorce situation, then I know that they're going to have to sell. And if it's already been on the market three months, I can already say, well, they've probably had some smaller offers, but one of them's being difficult and the other one wants to leave. And I may not even want to be in that purchase, because I don't need to be in their drama, and there's going to be drama in that situation.

So, like your neighbors — I'm not saying they got divorced — but if they were in a divorce situation, now all of a sudden they just can't stand each other to the point where they're going to just pay to get out so they don't have to live together anymore. Just be smart about it.

Especially because a mortgage is 30 years. I mean, a kid is 18. So if you think about that math, that's like double a child. Definitely want to think twice about that.

You can't just give either one away.

All right. Do you have any final thoughts on anything?

No, I think this was really good. I think I have a list of questions that you want to ask other people, to make sure you're doing your due diligence and make sure it's a sound financial decision for you.

Okay, that's all I got. You guys know the routine. Email tarisa@withoutthebank.com or myself at maryjo@withoutthebank.com. You can go to withoutthebank.com, grab your book, get your education, schedule an appointment with us so that we can help you, and we'll go from there. You guys have a fantastic rest of your day.