If you’re thinking about buying a home, you may have heard or seen advertisements for zero down payment loans. Lenders will sometimes use low or zero down payment as a teaser in advertisements to lure mortgage shoppers and begin a conversation. In reality, most people won't qualify for a zero down payment mortgage and for those who can qualify; these loans probably aren’t in their best interest.
Prior to the housing collapse, low down payment mortgages were more common among lenders than they are today. As housing prices dropped and interest rates rose, many home buyers who had purchased homes with low or no down payment found themselves stuck with negative equity and a high interest loan.
Many mortgages now require 10 to 20 percent down, which works to prevent negative equity if the housing market dips temporarily and returns home buying to an investment with a longer-term outlook.
There are a handful of government programs that offer low or zero down payment mortgage loans based on strict qualifications, including the following:
• VA loans
• USDA Rural Development loans
• Navy Federal loans
• FHA Loans
• Some State-sponsored loan programs
These loan options have strict requirements and many buyers won’t qualify. While low or zero down payment mortgages can be tempting teasers, these loan options create a higher risk for both lenders and buyers. The higher interest rate for these loans can add thousands of dollars to the final cost of your home. Fortunately, hopeful first-time home buyers have other options that can help them qualify for a safer conventional mortgage with 10 to 20 percent down.
Many first-time home buyers receive money toward their down payment as a gift from family, friends, or even employers. The person providing the funds as a gift to meet the 20 percent down payment requirement will have to prepare a gift letter to document that the money was a gift so the lender does not count this money as income for the buyer.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance is one of the more common ways that first time home buyers can qualify for a mortgage with less than 20 percent down. PMI is added to your mortgage payment until you reach 20 percent equity in your home. Private mortgage insurance protects the lender and enables you to qualify for a conventional mortgage with less than 20 percent down. Once you reach 20 percent equity in your home, PMI can usually be cancelled.
Government programs that provide down payment assistance may be available in some communities based on income, the home’s location, or membership in certain groups. Availability of these government programs and qualification requirements will vary.
Riskier and more expensive zero down payment loans can be costly in more ways than one. Now there are safer alternatives for buying a home which help assure that you and your family can stay in your home for many years to come. For more information about down payments, mortgages and first time home buyer education, download our eBook now!