Buying with $500 down: Is this 2006 or what?

[Marc C.]

Just had an offer on a $150,000 starter home. The buyer had a pre-approval letter and proposed a $500 down payment, FHA financing, and seller to pay all closing costs, because $500 was all the buyer had, period. (They wanted me to pay for the appraisal and the inspection, as well as all escrow fees and even the lender title policy. I declined the offer.)

Apparently, the New Mexico Mortgage Finance Authority offers a second mortgage called First Down that will cover the rest of the down payment and some portion of the closing costs. http://www.housingnm.org/homebuyers/first-down

This apparently allows one to buy with just $500 down. WOW! Did we learn nothing from 2005-2007? 

Is someone who has only managed to save less than what would be the deposit on an apartment really a good credit risk? Are they really ready for the hidden expenses of homeownership, like rising property taxes and maintenance/repairs? I think not. 

Any NM LMOs want to comment on whether I am correct and explain how this program works?