Today (9/17/2006) the Denver Post, in one of a series of articles on foreclosures, talks about the dangerous nature of 100+ per cent financing, not to all buyers, but to buyers who otherwise wouldn't be able to buy a home and who don't have the reserves to handle the many problems inherent in such loans, or to cover unexpected medical costs, the loss of a job, or another incident that may make mortgage payments impossible.  (Whew, that was a LONG sentence!)

If you're going to use 100% financing, be sure you know what you're doing.  Some real estate agents and some lenders will work overtime to provide marginal buyers with mortgages that will help them buy a house, but have them "upside down" on their mortgage (meaning that your house doesn't have enough value to support what you owe) in a matter of months, either from a general decrease in values, or by having what the Denver Post says lenders call "exotic" mortgages.  The Post says that every single foreclosure in Jefferson, Adams and Arapahoe counties filed in August was an "exotic" loan.

What's really the problem here is that prospective home buyers see that now they can buy with "zero down" when zero down financing should be limited to people who have a strong reserve either in cash or in assets they can quickly convert to cash, and a strong financial position in general.  Then if anything happens they have some money to fall back on during down times.  No solid financial profile here.

Zero-down loans are great for people who have great income but no cash for a down payment, and have a great financial profile.  One of the stories in the Post's story today was a man whose income was from his disability checks plus his new live-in girlfriend's tips as a casino worker.  When they split up he was in trouble. 

103% loans are common, where you can get more than the cost of the home when you buy.  But what happens if you get downsized at work and have a few large unexpected expenses.  A woman I heard about the other day on the radio didn't have insurance because she said "no" to the plan her employer offered, thinking she was too young to get sick (in her early 30s, and thought she could always buy insurance.  That's worth a whole other story, but she said when she finally tried to buy insurance that it was far too expensive, half her take-home pay!).  She was diagnosed with ovarian cancer and couldn't afford to pay the bills that mounted up for treatment -- a hefty $300,000+ dollars.  She didn't say anything about losing a house, but if she'd been in an "exotic" mortgage, there's no doubt what would have happened.  Yes, that's a lot of money.  But you never know when something like that could happen to you.

And that's the point.  Your financial future is always unknowable.  That's why you need a reserve and why you should know what you're doing when you borrow money to buy a house.

Some lenders, by no means all, offer these loans to marginal buyers because "If we don't do it, they will go down the street," as Mike Thomas of Hyperion Capital Group in Aurora said in the Post article.  Unfortunately, they don't have enough business to say "no" to buyers who may "look good" on the surface, but underneath you'll find either a gambler or somebody who's desperate to buy a house and will take these "exotic" loans just to be able to move into a house of their own.