A Guide to Home Loans With No Down Payment
Not so long ago, Home loans with no down payment were a popular financing option for new homeowners. While they’re not as common as they were in the past, these mortgages can still be had, as long as buyers meet the qualifications and know where to look. Also referred to as 100 percent financing, no down payment mortgages are processed similarly to conventional home loans. Read on to learn more about this mortgage option.
The Availability of 100% Financing
As of the time of this writing, Freddie Mac and Fannie Mae aren’t offering 100% financing, nor are private insurers covering these loans. Some investors’ groups and private lenders may make these loans available, and certain brokerage firms may fund them if they’re partially secured by a buyer’s investment portfolio. However, a non-government-backed 100% mortgage is quite rare, because lenders will lose money in the event of a default.
The Benefits of Buying a Home With No Down Payment
The primary benefit to borrowers looking to buy a house is the lack of a down payment, which means they can enter the market sooner and with greater financial flexibility. With these savings, homeowners can cover moving expenses and closing costs, or pay other debts, where they’d otherwise be spending money on a down payment.
Drawbacks of 100% Financing
No down payment mortgages have their share of risks. When less money is put down on a new home loan, monthly payments are higher, and equity building is contingent on the home’s value increasing. Furthermore, buyers with 100% financing must pay higher mortgage rates to cover lenders’ risk, or they must buy government or private mortgage insurance. The cost of this coverage is added to the monthly payment, paid upfront, or a combination of both.
Types of No Money Down Home Loans
Thankfully, there are a few ways to get Home loans with no down payment, as listed below.
- Rural housing loans through the USDA: The US Department of Agriculture allows those with low to moderate incomes to buy homes with no down payment. The USDA’s definition of ‘rural’ is quite generous, and most land areas in the US qualify.
- VA loans: If a buyer has ever been in the National Guard, Air Force, Army, Navy, or Marines, they’re likely eligible for a VA home loan. Mortgage lenders may request certificates of eligibility for buyers who don’t have them. The VA covers up to 25% of the home’s price, while a private lender covers the rest, and buyers only pay a funding fee.
- Down payment help: This assistance may be furnished by a charitable foundation, local government, or other organization. However, it can’t be provided by anyone with a financial interest in the sale, such as a mortgage broker, property owner, or real estate agent.
- The Good Neighbor Next Door Program: Teachers, first responders, and law enforcement personnel may be able to buy HUD houses at a 50% discount. If the home is financed with an FHA loan, the down payment may only be $100.
- FHA loans: While these mortgages require at least a 3.5% down payment, the buyer doesn’t have to cover those funds. They can be obtained from employers, friends, relatives, and other sources.
- Lease options: These are hybrids between purchase and rental agreements. Here, a renter leases a house for a predetermined time, and they may pay an extra fee, which is escrowed. At the end of the lease period, the buyer may choose to purchase the property for an agreed-upon price. Before entering such an agreement, a buyer should consult a real estate lawyer.
Homebuyers have multiple options when they lack the funding for a sizable down payment. If a buyer’s income is stable and sufficient, and they have relatively good credit, the lack of a down payment won’t always be held against them when getting a home loan.