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Is it wise to opt for a no money down mortgage?


Buying a home with zero down payment facility sounds very attractive to most of the home buyers. But in an actual situation, it’s very difficult to get a zero down payment home loan or mortgage. Most of the banks aren't providing such loan to the consumers. However, there are some options where a homebuyer can go for a no down payment loan. Here’s how you can opt for a zero down payment mortgage and the good and bad side of getting it.

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a. Several ways you can get a zero down payment loan

It's not possible for every person to qualify for a no down payment loan, but under some special circumstances, you might get the chance. First, if you’re a veteran, you'll get the chance to get a VA loan from the department of Veterans Affairs. You'll get the benefit as long as the sales price remains under the appraised value of the home. Another source of a small down payment loan is provided by the Federal Housing Administration, or FHA. The nation's biggest credit union also provides "zero-down" loan. The USDA also provide guaranteed no down payment home loans.

Following are some main source of low-down-payment and zero-down payment home mortgages that a borrower can opt for:

1. VA loan – Zero downpayment

The VA provides home loans with zero down payment for veterans who qualify. Normally, the private lenders create VA loans that the VA assures to the borrowers. Borrowers don’t need any mortgage insurance, but they need to pay a funding fee which will be reflected in the loan amount.

The VA funding fee may vary according to the nature of service the veteran has served during his/her career. The borrower must remain active in his duty or be honorably discharged to become eligible for a VA loan. Borrowers who served 6 years in the Reserves or National Guard are eligible, and the funding fee will be different for them. It may also depend on the frequency and number of VA loan taken by the veteran. The funding fee may vary from 2.15% to as high as 3.3%.

2. USDA approved loan - Zero downpayment

The USDA's approved rural development mortgage is very much popular. That’s why it runs out of money mostly for the fiscal year ending. Another good thing about this loan is that these loans aren't confined to farmland. The program was previously known as a Section 502 mortgage, but, now generally, it's called a Rural Housing Loan.

The USDA has a database on their website of the eligible areas highlighted in maps. The USDA zero down mortgage program has geographical and household income restrictions for first-time buyers, but there is some exception also.

The USDA zero down mortgage originates from a bank, and it has no mortgage insurance attached to it. But the borrower has to pay 2% upfront guarantee fee, which will be added with the loan amount. In addition, there is an annual guarantee fee levied on the USDA zero down payment loan of 0.5% of the balance.

3. PMI – Low downpayment

Yes, it’s not a zero down payment mortgage loan, but if the borrower qualifies, he can make down payments as low as 3% of the total loan amount with payment of private mortgage insurance, or PMI. Most qualified borrowers have PMI cost much lower than what they might have paid for FHA mortgage insurance. But...yes there’s a but also, that is to get qualified for a PMI, a borrower must fulfil strict credit requirements given by the lender.

PMI has another benefit. Once you reach 20% or more equity in the property, that means once you have paid 20% of the loan's value to the lender, you can cancel PMI. You can't cancel an FHA insurance unless you opt for a refinance through a conventional loan.

4. FHA approved loan - Low downpayment

You need to pay a minimum of 3.5% of the total loan amount as down payment to avail FHA mortgage loan. But it’s true; the FHA is quite a good option for the borrowers having low or imperfect credit score.

The FHA require an upfront premium of 1.75% of the total loan value. The borrower needs to pay 0.85% annual premium on a 30-year mortgage with low down payment. The FHA authenticates loans up to $625,500 in assigned high-cost areas that include California, Orange County, metro areas of Washington D.C, and, 5 boroughs of New York City.

b. Pros and Cons of a no money down payment loan

The benefits of a no money down payment mortgage are quite understandable. You can easily opt for a mortgage to purchase your new home without bothering about any down payment. This expresses a lot to a common buyer; he can buy a house without saving or borrowing the initial money from anyone. Though that sounds really amazing, it has some negative sides also. First, making zero payments means you’re not having any equity built up in that property at the time of buying it. So, practically you don’t have the option to take some monetary decision regarding your house. For an example, you can’t think of taking out a home equity loan or home equity line of credit, if you suddenly have any financial crunch, like home maintenance or other expenses on your shoulders. In addition, you’ll be paying off your home loan for a longer time compared to other conventional borrowers, who had put their money down initially. Finally, you’ll find yourself paying thousands more as interest to the lender at the end of loan term.

c. Final decision - Is a no down payment mortgage suitable for you?

As per the current housing market scenario, it's a good time to buy your new home. As compared to last few years, a new home buyer can take a deep breath and plunge into the sea of house hunting. Mortgage rates are lower today, for 30-year loans, 15-year loans, and 5-year ARMs. Apparently, as a new home buyer, your monthly cost of owning a home will be lower than before.

However, it is not the monthly housing cost that makes a borrower stressed off today. It's mainly the 20% downpayment which he/she has to arrange before buying a house. Common buyers might have earned well, but most of them have little saved in their account. The actual good news is that above mentioned no money down mortgage programs are here to help the general public - without any hassle.

Seriously want to buy a home with little or nothing down? Yes, you may.

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