One of the most commonly asked questions people have when buying a home is “Can you buy a house without a downpayment?” The answer is yes, but the real matter at hand is should you. There really isn’t a right or wrong answer to the question about whether or not you should buy a house without a down payment; however, you do have to weigh the pros and cons of your particular situation before you will be able to make an educated decision about what’s right for you. So let’s begin by going over what’s involved in a zero down payment home loan. Then we’ll discuss the pros and cons of 100 percent mortgages, including who they work for and who they don’t and the potential risks involved.
What Is a 100 Percent Mortgage?
A 100 percent mortgage is when a borrower does not have to put any money down before being approved for a mortgage loan. But why would a lender consider making a no down payment loan to begin with? Well, when property values rise, it creates more equity in those given home values. Additionally, lenders are more careful when it comes to their approval process and are more confident the people they approve have the capacity to repay them; therefore, they put less weight on the fact that the borrower doesn’t have a down payment.
Another major incentive for a lender to approve a no down payment loan is that they can charge higher rates on that loan. And because it includes a risk premium that helps cover the loss a lender might experience if that loan ends up in default. However, just because the lender is willing to provide a 100 mortgage, doesn’t mean the borrower should go that route.
Is a No Down Payment Mortgage Right for Me?
Obtaining a no down payment mortgage is extremely difficult unless you have good credit, a great credit score, and your debt-to-income ratio is ideal, and even then most banks still won’t approve a no down payment mortgage. However, it can be done under certain circumstances. For example, if you are a veteran, you might qualify for a no down payment loan through the U.S. Department of Veterans Affairs (VA).
If you’re not a veteran, you still might be able to get a no down payment loan through one of the USDA loans, which are the homeownership direct loan program and the single family housing guaranteed loan program, but of course there are some restrictions that apply for those as well.
Another reason you might want to consider a no down payment mortgage is if you know it will take too long to save enough money to put down and the interest rates are rising. And if you don’t act now, it could end up costing you more in the long run.
When Should I Not Consider a No Down Payment Mortgage?
You should never obtain a 100 percent mortgage if you have the money to put down on a home, even if you plan on doing an 80/20 split to get out of paying the PMI. This is when the first mortgage would be for financing the first 80 percent of the loan and the second mortgage would be for financing the remaining 20 percent of the loan. This would ultimately result in a higher overall cost than if you would have put down the 20 percent instead, because the rate will be higher on the second mortgage, not to mention the extra loan fees. Additionally, a 100 percent mortgage is automatically given a higher rate because you will be in the same high risk class as those who can’t or didn’t save enough money for a down payment.
What Are the Pros of a No Down Payment Mortgage?
Unfortunately, there aren’t many pros for obtaining a no down payment mortgage. However, there is one. For example, a no down payment mortgage would enable you to become a homeowner sooner rather than later, especially if it would take you many years to save enough to put down on a home. However, you will still need enough money to cover the closing costs and other fees. You will also still need to be able to qualify for such a loan and you will have to pay a higher rate for that loan than you would for a traditional mortgage loan.
What Are the Cons of a No Down Payment Mortgage?
Well, just as you have probably already suspected, a no down payment mortgage comes with some major cons. For example, if you don’t put any money down on your loan, you won’t have any equity in that home and it will take years before you will have enough equity built up to really be of any significant value. Â And if the real estate values fall, you could end up underwater, meaning you will owe more on that home than it’s worth. That means if you have to sell your home for any reason, you will end up owing the lender the difference between what your home sold for and what you owe on it.
Do I Have Any Other Options?
The good news is you do have options other than buying a home with no down payment. All it takes is a few small lifestyle changes and a little creativity. For example, you could borrow the money from a family member. You could also consider borrowing the money from your registered retirement saving plan (RRSP), if you don’t have much debt.
There are other ways to save the down payment for buying a home, as well. You could re-adjust your spending. And you can begin by changing some of your most wasteful spending habits. For example,  start making your own breakfast and lunch versus eating out. If you go out for dinner two to three times per week, you could cut it back to once a week. Do you grab a latte every afternoon? These small purchases add up quickly and changing them is very easy to do. And the money you save by doing so will help get you to your goal quicker than you ever dreamed possible. So why not take a few minutes now to see where you can cut your budget and start saving the down payment for your new home?
2 Point Highlight
1. One of the most commonly asked questions people have when buying a home is “Can you buy a house without a downpayment?”
2. There really isn’t a right or wrong answer to the question about whether or not you should buy a house without a down payment; however, you do have to weigh the pros and cons of your particular situation before you will be able to make an educated decision about what’s right for you.
