Down payments are traditionally the most expensive elements of a new home purchase.These out-of-pocket costs are a reality for most people, since extremely few mortgages are available without one. But this wasn’t always the case. In fact, zero-down or no-money-down mortgages were readily available prior to the subprime mortgage meltdown of 2008, when home values were rapidly rising and credit guidelines were laxer.
Today, no-down-payment home loans are only available to select individuals who can document the adequate income needed to repay loans. Such home-buyers must also exhibit minimum credit scores of 620. Private lenders might require even higher credit scores.
Thankfully, there are several programs that some aspiring homeowners may qualify for. This article lists some of these lesser known loan options.
- Down payments are traditionally the most expensive elements of a new home purchase.These out of pocket costs are all but inevitable, since extremely few mortgages are available without one.
- Today, no-down-payment home loans are only available to select individuals, who can document adequate income needed to repay the loan. Such home-buyers must also exhibit good credit, with minimum scores of 620.
- There are some no-down-payment programs, that certain people may qualify for.
Military families and veterans may qualify for a VA (Veterans Affairs) loan, which offers 100% financing. Available since World War II, this insurance program guarantees loans up to a certain limit—typically $424,100. Not only do these loans forgo the down payment requirement, but the mortgage insurance of 2.15 points can be wrapped into the loan. Loan qualifications vary from lender to lender, but they generally require a debt-to-income ratio of about 41%. (See The Unique Advantages Of VA Mortgages.) VA loan applicants must first obtain a Certificate of Eligibility (COE) from a VA eligibility center, by proving their military service.
USDA Rural Development Housing Loans
Potential buyers who live in specifically designated regions of the country may qualify for a U.S. Department of Agriculture (USDA) Rural Development Housing loan. Although these are meant for remote area residents, some residents living closer to town centers may also be eligible for this program. (Check the USDA eligibility page for designated areas.)
In addition to satisfying location eligibility requirements, USDA loan applicants must fall below certain income thresholds, as these programs are geared to low- and moderate-income households who struggle to save for down payments. Minimum required credit scores range from 600 to 640, and upfront loan guarantee fees of 3.5% of the loan amounts are required, however borrowers can wrap those fees into the loan balance, thus avoiding the need for cash at closing.
Navy Federal Loans
Navy Federal Credit Union--the nation's largest in assets and membership, offers 100% financing to qualified members buying primary homes. Eligibility is restricted to military personnel, U.S. Department of Defense employees, and their family members. This zero-down program is similar to the VA's, but boasts lower funding fees of 1.75%.
When Are No Down Payment Mortgages a Good Idea?
No-down-payment loans are ideal for individuals who must urgently buy a new home, but cannot source the cash needed for a down payment. Interestingly, mortgage interest rates are presently at historic lows. Consequently, some financial experts believe that now is an ideal time to lock in those rates, before they begin climbing.
When Are No Down Payment Mortgages a Bad Idea?
Putting zero money down has its drawbacks. If you finance 100% of a home purchase, you have no equity in the property – that is, you don't own any of it outright, like you would if you'd made a down payment. Consequently, lenders may tag you as a high-risk borrower, and require you to secure private mortgage insurance (PMI) before they sign off on the loan. This insurance, which protects the mortgage company if you default on the loan, typically costs between 0.5% to 1% of the entire loan amount, on an annual basis. And unlike the mortgage payments themselves, this expense may not be tax-deductible. (see Private Mortgage Insurance: Avoid It for These 6 Reasons).
Finally, zero down payment mortgages often carry higher interest rates than traditional mortgages, since lenders usually reserve the best terms for borrowers who can pay up front cash. For example, Louisville, Ky.–based Republic Bank currently offers a no down payment mortgage with no PMI and a seven-year adjustable rate mortgage (ARM), that has an initial interest rate of 4.729%. This rate is nearly a full percentage point higher Wells Fargo’s advertised rate. The monthly payment on Republic Bank’s loan would be $533 for every $100,000 borrowed, for the first seven years, after which time interest rate adjusts once a year, based on the LIBOR rate plus a margin of 2.75%.
Alternatives to No Down Payment Mortgages
There are alternative to no-zero-down payment loan programs such as:
Local Loans: Nearly every American state, county and municipality offers some type of home-buyer incentive program, that provides down payment assistance, closing cost assistance, low interest rate home loans, or a combination of the above. Many are restricted to buyers who meet certain income levels, and some are restricted to first-time homebuyers. Furthermore, some programs cater to groups of professionals, such as teachers, medical personnel or emergency first responders. While not all of these programs can eliminate the need for down payments, some offer grants or interest-free loans that cover some or all of the down payment. (See National Council of State Housing Agencies.)
FHA Programs: These loans require 3.5% down payment, however FHA guidelines allow for down payments to be funded by financial gifts from relatives, fiancées, nonprofit organizations, or other sources. The FHA likewise offers the Good Neighbor Next Door loan to teachers, police officers, and other public employees, who may buy a home with just $100 down--not quite 100% financing, but very close.
Piggy-back Mortgages: This strategy involves taking out two loans – one for 80% of the home's purchase price, the other for as much of the remainder as possible. Prior to the subprime mortgage crisis, an 80%/20% split was quite common. In today's tougher climate, the max might be an 80%-15%-5% plan, where you finance 80% with a primary mortgage, 15% with a second mortgage or home-equity loan, and make a 5% down payment.
Wait and Save: Postponing the home-ownership dream until you can make the standard down payment is a viable option. Besides, the time to buy may come sooner than you think, especially if you have some savings already socked away. For example, up to $10,000 may be withdrawn from an IRA for first-time home-buyer expenses--including down payments, without incurring the typical 10% early withdrawal penalty.
The Bottom Line
Gone are the days where practically anyone could secure an easy mortgage with little or no money down. But there are public programs, and a few private lenders, who can help.