Not long ago, no down payment home loans were the preferred financing option for many new homeowners. While not as popular as they once were, this type of mortgage can still be found -- provided borrowers know where to look and meet certain qualifications.
Also known as 100 percent financing, as the entire price of a home is borrowed, no down payment home loans are processed much like ordinary mortgages with down payments. Prospective homeowners need to present evidence of their income and assets, and their credit report is subject to review before they can be approved.
Buy Homes Faster
Obviously, the main advantage to borrowers is that no down payment is required in this type of arrangement. Buyers who don't have to make a down payment can enter the home market more quickly than those who must save the 3.5 to 20 percent typically required with a standard mortgage. A no money down mortgage also offers more financial flexibility. Homeowners can cover closing costs and moving expenses, or even pay down other debts, with money that otherwise would have gone toward a down payment.
Make Higher Payments
No money down mortgages are not without risk. Less money down translates to higher monthly payments, and building equity in this situation hinges even more heavily on appreciation of the home. What's more, buyers who obtain 100 percent financing are required to pay a higher mortgage rate (to cover the additional risk to the lender) or to purchase some form of mortgage insurance, either from a private company or as part of a government program. The cost of the insurance is added to the monthly amount due, paid upfront, or both.
There are currently no 100 percent mortgages available through Fannie Mae or Freddie Mac, the entities that own or back the majority of non-government mortgages in the US. Currently no private mortgage insurers in the US are insuring 100 percent mortgages.
Some private lenders or groups of investors may choose to make zero down loans available, and some brokerage firms do fund 100 percent loans if the mortgages can be partially secured by the borrower's investment portfolio. However, non-government 100 percent mortgages are rare -- because they stand to lose money if a buyer defaults on a 100 percent financed loan, banks and other lenders are wary of no money down mortgages. In today's housing market, such mortgages require some kind of collateral to secure the loan. Other special requirements may apply, depending on the lender.
Government-backed Zero Down Mortgages
The most common 100 percent mortgages offered today are VA home loans for qualifying service members, veterans and (sometimes) their families, and Rural Housing loans offered by the USDA. In addition, eligible buyers (first responders, teachers and nurses) can buy HUD foreclosure homes for half price with just $100 down. Finally, FHA mortgages allow borrowers to receive down payment assistance and get home loans with no money down. Those likely to qualify for such assistance are first-time buyers who meet income eligibility guidelines and take home buyer education courses, or those who buy property in designated redevelopment areas. FHA also allows buyers to borrow their down payment or accept gifts from family members, employers or charitable organizations.
Interested consumers should check with their state housing authorities for more information or consult HUD's state pages for local programs.