[IshKebab]

Much higher interest rates presumably. I don't think there's any fundamental reason why you shouldn't be able to buy a house without a deposit. A deposit just shows you can be sensible with money, and therefore the loan is much lower risk for the bank.

But if a bank is willing to take on the high risk in return for very high interest rates there's no particular reason why it shouldn't be possible. It may end up being exploitative, like payday loans, but not necessarily.

[lordnacho]

> A deposit just shows you can be sensible with money, and therefore the loan is much lower risk for the bank.

Is is lower risk, but it's not because it's some weird moral test.

The reason is that the lender only loses money once the value of the house has declined by the amount of the deposit. Say you buy a house with 20% down. If you sell the house at 80% of the value, you've wiped out your deposit but the bank loses nothing.

On the flip side if the house goes up and you sell for 120% you've doubled your money, but the bank isn't any better off.

[mikeash]

Credit ratings are an attempt to turn weird moral tests into a concrete number, and they have a massive effect on one’s ability to get a mortgage. It wouldn’t be at all surprising for a bank to try to account for factors the credit score misses.

[gizmo686]

What "moral tests" do credit scores use? You could certainly argue that they are not an accurate reflection of credit worthiness.

[mikeash]

Whether you’ve paid back your debts previously.

[SilasX]

Well, yes, the down payment does reduce the bank's loss in some cases, but it does also function as a "moral test" in the sense the parent meant.

Every mortgage application asks if someone else is contributing to the down payment. That wouldn't matter unless there were a difference in risk classes between the two groups of people, so it's not purely a matter of a better loan-to-(initial-)value ratio.

Edit: looks like that's not the (dominant) reason; see follow up thread.

[vageli]

> Well, yes, the down payment does reduce the bank's loss in some cases, but it does also functional as a "moral test" in the sense the parent meant.

> Every mortgage application asks if someone else is contributing to the down payment. That wouldn't matter unless there were a difference in risk classes between the two groups of people, so it's not purely a matter of a better loan-to-(initial-)value ratio.

Don't they ask if someone is contributing to the down payment because it could be categorized as a loan that would factor into your income to debt ratio?

[SilasX]

I just googled the issues related to mortgage downpayment gifts, and it looks like you're correct. This is the best summary of issues I've found and it doesn't mention anything about being higher risk in and of itself:

https://www.accunet.com/buying-a-home/can-my-down-payment-co...

From that page, the bank wants to make sure it's not a loan or a side-payment from one of the parties to the transaction.

Still, I'd be really, really surprised if there weren't a correlation between "fraction of DP as gift" and "default rate", but I don't have anything concrete to cite ATM.

[hn_throwaway_99]

My argument is that zero-percent down loans will always end badly, because if you don't have the discipline to pull together even a measly 5%, you don't have the discipline required for home-ownership. And it's not like banks can charge payday-loan like rates on a mortgage, because if you can't afford a small down payment you also can't afford high monthly rates.

These types of loans always increase when credit is cheap, and then they end badly (sometimes very badly) when the economy eventually turns.

[SilasX]

Those are good points (and I said something similar in my cousin comment), but you're overstating it by saying they always end badly. Obviously, some percentage of such mortgages are paid back. (I'd agree if you meant they go bad at the macroeconomic level, but you specifically clarified that you were referring to the individual who can't make a down payment and saying they will also fail to pay it back.)

[hn_throwaway_99]

Yes, you are correct, I'm not arguing every single mortgage will end in default, but that every macro environment where zero down mortgages proliferate will always end in tears to whoever is left holding the bag (currently homeowners and investors, and, crucially, rarely loan originators).

Of course, to my knowledge, the only environment where zero down mortgages were really widespread was the mid-aughts housing bubble, but even with an n of 1 I still think it's a bad omen.