More accessible home loan options are the way of the future, and 20 percent down payments are a thing of the past. If you’ve ever let the stress of a down payment mortgage stop you from trying to buy a home, there’s another way.
These days, financial institutions understand that one option does not fit all. But does that mean a no-down-payment mortgage is right for you? Read on to find out more about this type of mortgage, including all the benefits and the risks.
What to Know About No-Down-Payment Mortgages
Yes, this really means you could get a mortgage without putting any money down. In other words, it means the lender would finance 100 percent of your initial home purchase.
You still need to meet certain criteria to qualify for a no-down-payment mortgage, including certain credit score requirements. You should also be able to prove that you have a steady income.
Benefits of No-Down-Payment Mortgages
First of all, you won’t have to save up to put down a large sum of money. A no-down-payment mortgage opens the door for a lot of people who would’ve assumed they couldn’t get a home otherwise. You can also get a loan faster, meaning that you can get into a home sooner rather than later. This can be especially beneficial if you are trying to get out of a living situation as fast as possible.
No-down-payment mortgages are especially beneficial for first-time homebuyers. First-time homebuyers are less likely to have a ton of money saved, so these loans are one of the ways first-timers can get approved for a loan without going the traditional route.
Typically, people who fit into this category are younger. That means they’re less established in their careers. Or they could still be paying off student loans. These factors shouldn’t be a hindrance to getting a house.
No-down-payment mortgages often have monthly payments that are roughly the same as what you’re paying to rent an apartment. Your budget can stay the same while you invest in your future instead of your landlord’s.
With no down payment necessary, you have increased financial flexibility. You can use your savings toward other home-related expenses, like furniture or home improvements.
While it depends on the lender, there are different options available: USDA home loans, VA loans, FHA loans, and so forth. For these loans, borrowers have to fit different parameters to qualify. For instance, USDA loans are usually dependent on an applicant’s location, the size of the home, and the borrower’s income. VA loans are given through the US Department of Veterans Affairs and don’t require mortgage insurance (more on this below).
There are no-down-payment home loans that aren’t government-backed as well. Individual financial institutions such as Solarity Credit Union usually have their own low- or no-down-payment mortgage options as well.
Risks of No-Down-Payment Mortgages
It’s important to consider all facets of financial options before making any decisions. While no-down-payment mortgages have many benefits, there are some risks.
A zero-down mortgage could come with higher interest rates. This is because many lenders may see you as more of a risk. Higher interest would mean higher monthly payments. This could end up costing you quite a bit over time. Even with lower rates, you could end up paying more interest, both monthly and in the long run. The more you borrow, the more interest you pay. In addition, no-down-payment mortgages may come with extra fees. These additional charges can add up.
You could end up underwater on your mortgage, which means you could wind up owing more than your home is actually worth. This could happen if housing prices drop. While your home will hopefully only become more valuable, this is a risk you should be cautious of. And if your mortgage does go underwater and you want to get out of the mortgage, you may have to pay a large sum to your lender. This could lead to other financial problems later on.
If the housing market is currently in a rough spot, it probably isn’t the best time to start a no-down-payment mortgage.
When your down payment is less than 20 percent, private mortgage insurance, or PMI, could be added to your mortgage payments. PMI is an annual fee paid off monthly. It can range from 0.3 to 1 percent of a mortgage’s outstanding balance. While that percentage may look small, it could be hundreds of dollars. The exact amount can depend on certain factors like the loan rate and your credit score. Plus lower down payments could lead to higher premiums.
Finally, if you start off with no down payment, it will take longer to build up much equity in your home. This could prevent you from qualifying for a home equity loan or HELOC at a time when you might need it. For instance, many turn to their equity if they need major repairs.
Fortunately, some no-down-payment mortgages also include features to prevent these risks. This can include reduced PMI and waived fees.
Other Mortgage Options
If you’re put off by the risks, don’t fret. There are still many ways home ownership can be attainable.
In addition to no-down-payment mortgages, there may be other types of mortgages or programs specifically for first-time homebuyers. If this is your first time, you should at least look into these other options.
Consider a low-down-payment mortgage instead. This still allows you to save but may mean fewer risks and a lower interest rate. This could mean putting down 1, 3, 5, or even 10 percent. So, it would still mean a down payment, but a more attainable one.
If you currently have a home but want to move out of it before it sells, a bridge loan might be a good option. This is a short-term loan used to tide you over until you finalize the sale of your existing home.
Of course, you can always go the traditional route. If you have enough to put down 20 percent without draining your account, you might choose to do so to avoid certain risks.
Now that you know about the benefits and risks of no-down-payment mortgages, you’ll be able to make an informed decision. Look into different lenders in your area and compare options. For instance, if you’re in Yakima, WA, you can find more information about Solarity Credit Union’s no-down-payment mortgages on their website. Take the time to find the mortgage option that’s right for you.