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Mortgage No Money Down - What You Need To Know About No Money Down Mortgages

payment pmi loan homeowners

Finding a no money down mortgage isn’t as easy as it once was, but it is still possible. As foreclosures have increased and lenders have struggled, lending policies have been tightened up. Why? Real estate values in many areas have been flat or declining, plus a zero down mortgage is riskier for the lender. Homeowners who have made no down payment essentially have no financial stake in their home and are more likely to just walk away when times get tough.

The industry standard not so many years ago was 20% down, giving homeowners some equity at the outset of the loan and providing lower risk for lenders. As real estate values skyrocketed a few years ago, both lenders and homeowners looked for ways to cash in. Consequently, many lenders began offering new and riskier options for getting a mortgage. No money down mortgages became extremely widespread and popular, but combined with falling real estate values over the last few years, many homeowners found themselves underwater on their mortgages (owing more than the home could sell for). Lenders had no choice but to tighten their policies, making it extremely difficult to get a mortgage with zero down.

What are today’s options? While there are several options for getting a low down payment mortgage, no money down mortgages are all but impossible unless you are a veteran who qualifies for a VA loan. FHA loans, which once were a fairly small percentage of the mortgage market, have increased tremendously and are now the most popular option for low down payment mortgages. It is possible to get an FHA mortgage with as little as 3.5% down. Freddie Mac also offers a mortgage option with just 3% down. Another option for those unable to make a down payment is that some loan programs allow money from other sources to be used toward the down payment. In other words, gifts from relatives or employers may be used toward the down payment on a mortgage.

There are some distinct disadvantages to a zero down mortgage. No money down means the homeowner is starting out with a larger loan balance and a higher monthly payment. Another disadvantage is private mortgage insurance (PMI). The purpose of PMI is to provide insurance to the lender in the event the homeowner defaults on the loan. Homeowners who have put less than 20% down on their mortgage are generally required to pay PMI. While PMI does allow potential homeowners a way to still get a mortgage if they have less than a 20% down payment, it also means a higher monthly payment. PMI is typically ½% of the loan amount annually. On a $200,000 loan, this means the PMI premium would be $1000 per year or about $83 per month. PMI is required by law to be dropped by the lender once the homeowner has 22% equity in their home, but some programs allow the PMI premium to be dropped once homeowners hit 20% equity.

Despite its disadvantages, no money down mortgages could make sense for some homebuyers.
• First-time homebuyers: First-timers may have no other option for purchasing a home other than a zero or low down payment loan. The disadvantages of these loans may still be a better option than continuing to pay rent.
• Real estate values rising quickly: Even though you wouldn’t be building equity with a down payment, you could build your equity through the increasing value of your home.
• Invest the money elsewhere: For years, it was a pretty good bet that real estate values would rise. This hasn’t been true over the last few years. In many cases, values have dropped dramatically. If you have the discipline to actually invest the money you would have used for your down payment, you may be able to get a better return on your money investing it somewhere else.
• Pay off debt: With interest rates on debts such as credit cards and auto loans well into double digits, you may want to put your down payment funds toward paying off these debts. While the real estate market can be something of a gamble these days, it’s a sure bet that you’ll get an 18% return, for example, paying off the balance on a credit card with an 18% interest rate.
• Moving costs and other start-up expenses: Moving can be expensive unless you have an employer picking up the tab. There are also a variety of other costs associated with buying a home. Unless you have the cash to pay for these expenses, it could make sense to use down payment money to cover these costs rather than take on credit card debt to cover them.

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