While 0 down home loans are not as prevalent now as they were 10 or 20 years ago, it’s still possible to buy a house with little or no down payment. Most lenders require minimum down payments of at least five percent for conventional loans, but they’ve gotten creative in how you can come up with the down payments. If you do find a zero-down mortgage that you qualify for, give it a lot of thought before you sign on the dotted line. Going into a home purchase without any equity isn’t the right choice for everyone.
What Are the Benefits to 0 Down Home Loans?
Many borrowers are in a financial position where they can easily handle a mortgage payment and upkeep and maintenance of a home, but they don’t have enough to save up for a decent down payment. That’s especially true when these hopeful home buyers are raising a family while putting away money into college, retirement and emergency funds. Zero down home loans can help this type of borrower purchase a home where they otherwise would be able to.
Even for those who are currently saving up money to purchase a home, they may not be able to save what they need quickly enough to take advantage of the low rates available today, and it an cost them a lot of money if rates rise significantly. Taking out a $200,000 30-year fixed-rate mortgage today at just 3.5 percent will cost a borrower $898.09 per month and total interest over the life of the loan of $123,312. If you wait to purchase that home until you have a 20 percent down payment and rates rise just two percent, that same loan at 5.5 percent will cost you $1,135.58 per month and $208,808 in interest over the life of the loan.
Are There Risks to Taking Out a No Down Payment Mortgage?
Before the housing crisis hit, 0 down home loans were a dime a dozen. One of the most popular deals was the 80/20 combo loan where you would take out a first mortgage for 80 percent of the purchase price and a second mortgage for the 20 percent down payment. As long as homes continue to appreciate and you can afford the payments, this type of deal works well.
In the mid-2000s as house values started to decline, millions found that they were stuck with mortgages that were underwater, meaning they owed more on the home than it was worth. With millions of homes under foreclosure, lenders scrambled to tighten up their loan requirements, and that’s why these no down payment mortgages are hard to come by.
Since that time, many studies have repeatedly found that borrowers who walk into a mortgage with no equity are at a much higher risk of defaulting on the loan, as they has less at stake financially.
Don’t I need a 20 Percent Down Payment to Get a Conventional Mortgage?
Lenders for conventional mortgages want to lend to borrowers who put down a minimum of 20 percent on the homes they buy, as the borrower then has more of a stake in the home and more to lose if they default. That doesn’t mean that you can’t get a conventional loan with a smaller amount down. If you have a solid credit rating, a good payment history and enough cash reserves in the bank, some lenders will allow you to put down as little as five percent.
These smaller down payments come at a price. If you put down less than 20 percent on your home, you may be required to pay for private mortgage insurance (PMI) until you reach a loan-to-value ratio of 80 percent. Depending on the purchase price of your home, these premiums can add less than a hundred dollars to your monthly payments or up to several hundred.
Where Can I Find 0 Down Home Loans?
Though zero-down mortgages are difficult to find, they do exist. The Veteran’s Administration, for example, offers 100 percent financing for most past and current member of the military and their spouses. In addition to affordable interest rates, VA loans do not require mortgage insurance, and a credit history with a bankruptcy or other type of derogatory credit doesn’t immediately disqualify you.
The USDA also offers zero-down mortgages called rural housing loans. This program tries to reach home buyers with low or moderate incomes, and it’s available to certain homes in both rural and suburban neighborhoods. While there is a cap on the amount you can spend on the home, you can include some specific home improvements and repairs into your mortgage.
If you belong to a credit union, look into their mortgage programs. Many offer mortgages with little or no down payments. Also, many states have homebuyer programs designed for those who can afford monthly payments but don’t have enough cash put aside for a down payment. The National Council of State Housing Agencies website lists most of the state programs that may be available to you.
Are There Other Ways to Come Up With a Down Payment?
Saving enough money for a down payment is an important step when you’re considering buying a home, but it isn’t always possible. FHA loans require a minimum down payment of 3.5 percent, but unlike conventional loans, all of that down payment can come from gift funds. If you’re putting down the full 20 percent on a conventional loan, many lenders will allow the entire down payment to come from gift funds. If you’re putting down less than 20 percent, none of your down payment can be a gift. If you have a retirement fund, you can also borrow against that for your down payment.
Some loans are built specifically for borrowers with a strong credit and financial history but not enough money saved. If you can come up with a 10 percent down payment, you may be able to take out an 80/10/10 piggyback loan. This means that you’ll borrow 80 percent of the purchase price, put 10 percent down and then take out a home equity loan or home equity line of credit for the other 10 percent.
2 Point Highlight
Most lenders require minimum down payments of at least five percent for conventional loans, but they’ve gotten creative in how you can come up with the down payments.
Zero down home loans can help this type of borrower purchase a home where they otherwise would be able to.
