No Money Down Loans - Where to Borrow, What to Avoid
You've Got Options, and It Might Be Better to Make a Down Payment
Buying a home with no down payment takes care of one of the most difficult parts of a home purchase: the down payment. It’s difficult to save that much money, and it’s scary to put it all into a home when there are other needs and uses for that money. You can certainly find lenders that offer no money down loans, but it’s important to understand the pros and cons of those loans.
How to Buy With No Money Down
Government loan programs are your best option.
When the U.S. government guarantees lenders against loss, they are more likely to approve loans with no down payment. But you still need to qualify for those loans. If you don’t conventional loans may be an option, or you may have to at least make a small down payment on your home.
VA loans are available through the U.S. Department of Veterans Affairs (VA). Servicemembers, veterans, and eligible spouses can buy a home with zero percent down. Those loans do not have monthly mortgage insurance premiums, so monthly payments can stay relatively low (but whenever you buy with zero down, your payments will be high). Numerous lenders in the U.S. can provide these loans, so speak with a mortgage broker or financial institution to apply. Lenders compete for your business, so compare offers from several different sources. They will all have different interest rates and closing costs.
USDA loans are backed by the U.S. Department of Agriculture (USDA) and are designed to promote home ownership in rural areas.
Those loans have income limits, although you can typically earn up to 115 percent of the U.S. median family income (or use a state-wide measure) to qualify for the loan. As with VA loans, lenders need to participate in the USDA program, but there are plenty of mortgage brokers and banks to choose from.
Get offers from multiple lenders and compare costs before you decide.
If you don’t qualify for a VA or USDA loan, you may be able to buy with no money down using other sources (or you may need to make a small down payment). In years past, it was easier to buy with no down payment. After the mortgage crisis, it’s not as easy.
Down payment grants and assistance can help you effectively buy with a zero percent down payment. Technically, somebody is making a down payment, but it might not be you. Search for local organizations that you may qualify for, and ask a local Department of Housing and Urban Development (HUD) representative for any resources available. Some first time homebuyer programs may also be helpful. These programs are hard to find and harder to qualify for. However, if you are the right fit for an organization, you may be able to get the help you need.
80/20 loans, also known as piggyback loans, allow you to buy using two loans. Before the financial crisis, this strategy was a popular strategy. Nowadays, you’ll need the right credit and income profile to qualify. To use this approach, you’d get a first mortgage for 80 percent of the home’s value (giving you an 80 percent loan to value ratio for that portion, which means you would not have to pay private mortgage insurance).
The remaining 20 percent comes from a second mortgage that you get at the same time as your first mortgage. The second loan will have a higher interest rate, but borrowers typically try to pay that loan off quickly. Check with local banks and credit unions to see if they offer 80/20 loans and to find out what the requirements are.
Private lenders may be willing to lend you 100 percent of a home’s purchase price. These may or may not be professional lenders. In many cases, those loans come from family members who just want to help out (they are not in the business of lending). If you go that route, use a written agreement so that everybody understands (and has documented) the details of your arrangement. Consult with a local attorney, real estate expert, and accountant before you sign the agreement, as you will want to follow all applicable laws (and you may be able to get tax or other benefits if you set things up properly).
If you’re fortunate enough to have that option, it can be a win-win situation, but everybody needs to know what they’re getting into.
It May Be Best to Make a Down Payment
The appeal of buying with no money down is obvious: You don’t need a large sum of money, you can use your savings for furnishings and home repair, and you can probably buy sooner than later. But there are several drawbacks to borrowing the entire purchase amount.
Higher monthly payments: The larger your loan, the higher your payments will be, and you’ll be stuck with that payment for the life of your loan. To see how the numbers work, calculate the payments on any loan you’re considering. Try using larger and smaller loan amounts (a down payment reduces the loan amount) to see how much it matters. When you’re stuck with a large payment, you have fewer options in the future. Any injuries, job changes, or other surprises will be harder to avoid.
Higher interest costs: Borrowing 100 percent of a home’s value will increase the overall cost of your home. You might not need to write a check today, but you’ll pay more interest on your loan than you would have paid with a healthy down payment. That difference in interest can amount to tens of thousands of dollars over the life of your loan. To see some of those numbers, look at loan amortization charts for any loans you’re considering.
Private mortgage insurance (PMI): When you borrow more than 80 percent of your home’s value, you’ll need to pay PMI, which protects your lender. The only benefit you get out of that payment is the opportunity to buy with no money down (including the pros and cons discussed here). That expense can add thousands or more to your total lifetime cost, and it further increases your monthly payment.
Home price declines: Ideally, your home will gain value over time. But that doesn’t always happen — homes lose value, and you might be forced to sell at a loss. If that happens, you may owe more on the home than it is worth. To get out of your loan, you’ll need to make a substantial payment to your lender, and that’s never a welcome event.
Essentially, you’re taking a significant risk when you buy with no money down. Your income needs to stay the same or increase, and your home needs to increase in value more quickly than you bleed cash. We all believe those things will happen, but many before you have been proven wrong.