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The Real Meaning of Zero Down Payments & the Implications of This Practice

The typical home down payment is about 20 percent of the purchase price. This amount is used as the standard when saving up to buy a home. However, over time, other down payment amounts and mortgage programs have popped up. There were even programs created that offered low to zero down payment options for home purchases.

Then, the bottom fell out of the home mortgage market. Some home owners who had purchased houses with a zero down payment offering found themselves upside down on their mortgages. Unable to pay and left with no real equity in their homes, these buyers often walked away and left their houses to foreclosure. As a result, new legislation cropped up and practices changed to avoid further fallout.

Today's Home Down Payments
While most of today's conventional mortgages call for 10 to 20 percent down, there are several government programs with specific qualifications that do provide zero down payment offerings. These include the following:

  • VA loans
  • USDA Rural Development loans
  • Navy Federal
  • State-sponsored programs
There's also an extremely low down payment program with strict parameters called Conventional 97 which allows down payments of merely 3 percent of the home purchase price. Families and individuals eager to own their own homes may be tempted to take advantage of these programs. For many, this can be a costly error.

Zero Down Payments, Interest Rates & Private Mortgage Insurance
Opting for a zero down payment loan will most likely greatly increase your overall home purchase price. Understand that your inability to pay a viable down payment places you in a higher risk category. Lenders are worried that this may be a sign of some of the following credit risk indicators:

  • You are not as financially secure as they would like.
  • You may not have the financial skills required to budget and save adequately.
  • If you run into financial issues, you may default on the mortgage because you have no equity.

These factors will result in a higher interest rate that can cost you thousands of dollars over the life of your mortgage.
In addition to potentially high interest payments, you will likely be mandated to purchase private mortgage insurance. This is a great tool for first time home buyers to use to reach the 20% down payment, but it is usually most successful when there is more than a zero to three percent down payment.

Alternatives
There are other ways to fund your 20 percent down payment. You can take the time to save more than one to three percent of the value of the home you want to purchase and then use private mortgage insurance added to your monthly payment until you hit the 20 percent mark. You may also take advantage of gift funds from a family member with an official gift letter. Bear in mind that your credit history and income situation play a big role in all of these financial transactions and decisions.

For more first time home buyer education, information about down payments and different mortgage products, download our eBook now!

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