For many prospective homeowners, the biggest hurdle is the down payment. While conventional loans can require a 20% down payment, there are other loan options with much lower down payment requirements. And in some cases, you may be eligible for a mortgage with zero down. But just because you may qualify to buy a house with no money down doesn’t always mean you should. Here’s what to know about types of zero down payment mortgages, plus their pros and cons.
The Zero Down Payment Mortgage
This type of mortgage is self explanatory — it’s a home loan that requires no money down at closing. The VA loan is one example. This type of mortgage is insured by the U. S. Department of Veterans Affairs (VA), and it’s designed for active-duty service members, eligible veterans, and the qualified spouses of military personnel. Because the VA backs these loans, there is minimal risk to lenders and qualification requirements are a little more relaxed. One of the perks of a VA loan is no down payment, as long as the sales price isn’t higher than the home’s appraised value. The VA loan doesn’t mandate private mortgage insurance (PMI) either, and closing costs are typically limited.
A USDA loan is another kind of no down payment loan. This is another government-backed loan, this time through the United States Department of Agriculture. They’re designed to assist people in lower-income brackets who are looking to buy homes in rural parts of the country.
While an FHA loan does require a down payment, it’s significantly lower than the conventional loan minimum of 20%. A down payment for an FHA loan can be as low as 3.5% of the home’s purchase price, which may put home ownership within reach for some people.
Upsides and Downsides
It can be difficult to save up a sizable chunk of change for a down payment, especially if you’re trying to save 20% of a future purchase price. The idea of getting a mortgage without having to save for that down payment may sound like a dream, but it does have its downsides:
- Without a down payment, you’ll have no equity in your home when you buy it.
- You’ll also likely be required to pay for PMI, which is an additional payment over and above your monthly mortgage payment.
- You’ll likely be paying off your loan for longer than you would have with a down payment. Interest adds up significantly over the life of your loan, so it’s not a small consideration.
- A low or zero down payment can be an issue in the event your home’s value drops. In that scenario, you could find yourself owing more money than the house is worth, a situation known as negative equity.
Is a Zero Down Payment Right For You?
Here in Reno, the Cushing Team of Guild Mortgage has worked with hundreds of home buyers to help them find the right loan. If you’re interested in learning more about zero down payment loans or any of our other mortgage options, contact us today.