It’s tough to buy a home these days with limited funds. To come up with a homebuying budget, buyers must carefully calculate how to manage sky-high home prices, stubborn mortgage rates, home maintenance costs, and perhaps renovations.
Then there’s the ever-daunting down payment, which can feel like the final, massive obstacle standing between the everyday home shopper and the American dream.
But what if buyers could eliminate the down payment from the homebuying equation?
Last month, one of the nation’s largest mortgage lenders, United Wholesale Mortgage, launched a new zero-percent down mortgage program, prompting many bottom-line-minded buyers to wonder if homeownership is indeed within reach.
Yet putting 0% down on a home isn’t a new tactic.
Jerry DevlinofAssume Loans in Brookline, MA, says that low- and no-down payment loans have been popular options for years.
“The two most notable programs are the Federal Housing Administrationand Veterans Administrationloans,” he explains. “These programs are meant to help make homeownership more accessible for those struggling to save a large downpayment.”
Luckily these low- and no-down-payment loans aren’t just for veterans or first-time buyers. Read on to find out if 0% down is right for you—or an option you should avoid.
Who is eligible for a 0% down mortgage?
Experts say the easiest way to avoid a down payment is to qualify for the VA or FHA low- and no-down-payment programs.
“VA loans allow veterans to buy with no money down, and FHA loans allow anyone to buy with as little as 3.5%,” says Devlin.
However, other zero-down mortgage programs are usually geared toward first-time or low-income borrowers. For example, Bank of America launched a mortgage program that requires no down payment or closing costs, aimed to promote homeownership in minority communities in Charlotte, NC, Dallas, Detroit, Los Angeles, and Miami.
Programs like these are meant to assist lower-income first-time homebuyers. They are restricted to buyers with certain income and asset amounts and often require homeownership education classes.
Which buyers benefit most from these loans?
According to Devlin, loans that require no money down are great for people who want to jump into the housing market and anticipate making more money in the future, perhaps from a promotion or a recent degree or certification.
Meanwhile, Richard Redmond of Redmond Mortgage Capital in San Rafael, CA, says that these programs can also be great for people who want to buy their forever home—or at least a home the buyer intends to stay in for a long time.
“It can be really good if you’re going to settle down somewhere,” Redmond says. “Because you’re going to build equity over time. And even though the interest in the real estate market has its ups and downs, you’re going to be fine over a long period of time. Real estate values usually rise.”
Who shouldn’t use 0% down payment loans?
While putting down little or no money sounds attractive, these loans are not for everyone.
Taking out a massive loan could be troublesome for people who have had issues saving in the past. For instance, if a buyer is tight on funds when they buy a home, they might find themselves underwater when unexpected bills pop up.
Devlin notes that the cost of homeownership can be unexpectedly high when insurance, taxes, and maintenance increases outpace inflation.
“Homeownership can have lots of unanticipated expenses,” says Devlin. “If someone cannot save for a decent down payment, they may also have trouble coming up with the money for unanticipated repairs.”
What’s the catch of a 0% down loan?
Buyers should know that these low-down payment plans can help them get into a home, but this tactic does not make the home cheaper overall. In fact, buyers will likely end up paying a little bit more in the long term.
“You will have a lower monthly payment if you put more money down as certain loan programs will then remove the requirement for private mortgage insurance,” says Cedric StewartatEntourage RG of Keller Williams in the Washington, DC, area. “But that’s typically a part of a payment up until you put down 20%.”
Private mortgage insurance (PMI) guarantees these loans for the investor from default, and payments range from about 0.3% to 1.15% of a home loan.
Note that VA loans do not require PMI, and FHA loans require mortgage insurance premiums (MIPs), which are similar to private mortgage insurance.
Not putting any money down might also mean buyers will pay a higher mortgage rate on some loans because lenders are taking on more risk. However, VA and FHA loans often offer the lowest going rates.
A 0% down loan might be a great choice, even if you have extra cash
While many buyers are interested in a zero- or low-down payment loan because they don’t have the funds saved up for a 20% down loan, Redmond notes that a small down payment might be a good financial strategy for those with savings.
Some people put everything they can into their down payment, trying to get their rate lower. But a buyer could instead choose to put that money elsewhere in an investment they think will perform better or could simply save the money for a rainy day.
“If it were me, I would like to have the money in my savings account,” says Redmond. “Even if I have to put down very little or nothing for the down payment, knowing that I’ve got, maybe, $10,000 sitting in the bank, I’d like to keep a little money to reserve, just in case.”
