You’re earning well, you’re saving…but that piggy bank just won’t support a “healthy” downstroke for a home purchase?
You’re not alone.
That’s the case for more and more of us.
A no down payment mortgage allows homebuyers to purchase a house without requiring any cash for a down payment.
There are a few no down payment home loan programs, as well as several low down mortgage options available to borrowers in 2017.
Government Mortgage Programs with No Money Down
Government-backed loans such as FHA, USDA, and VA options and many new mortgage program begun by private lenders or brokers. Buyers now can purchase a home with very little or NO money down at closing.
But is that truly the best way to go? Isn’t it still far better to put down as much as you can scrape together?
Let’s consider that for a few moments.
You Don’t Need a 20% Down Payment Anymore
In times past, you were basically locked out of the best rates if you didn’t put 20 percent down on a home purchase.
You may have been locked out of the market entirely, as a matter of fact, because that was what lenders looked for as one of the proofs of your solvency. In point of fact, the 20 percent figure hasn’t been a “requirement” since the Federal Housing Administration came into existence in 1934.
The Truth about Mortgage Insurance
Truth to tell, PMI doesn’t “brand” you as a bad risk. It’s simply a layer of extra protection for lenders in the event of foreclosure on your mortgage. Period.
Yes, it costs money. Yes, technically, that money could be used to buy you “more house.” But it’s not a curse, a black mark against you in the Mortgage Rolls, or—as it turns out—even that much of an expense over time.
As an example, at the rate of appreciation today’s homes are showing, a buyer who puts 3 percent down pays PMI for only four years.
Compared to the time lapse between when your mortgage payment is largely interest versus when it starts whittling down your principal, that’s hardly a drop in the bucket. And yes, despite what you may have been led to believe, PMI can eventually go away.
That happens when you achieve 20 percent equity in the home, in effect fulfilling the “down payment” amount over time. (Good luck trying that with interest!)
But It’s Still Better to Make the Biggest Down Payment You Can Manage. True or false?
Yes. To both.
What you need to determine is how much home you can actually afford based on what YOU’re comfortable with, not what a bright-eyed salesperson says you “can afford” based on their number-crunching.
Those numbers always end up looking like you have way more money than you actually have…and they can be a trap. Because true home affordability isn’t about the size of the down payment you make; it’s about whether that will give you any money left over for Real Life.
Digging deep into your savings to give yourself a lower monthly payment isn’t wrong, unless it depletes you completely. Then, you can end up being what financial experts refer to as “house-poor.” On paper, you’ve got plenty of resources—but they’re all tied up in the house, and you have no cushion left over to take care of contingencies.
This can lead to embarrassments like living in an upscale neighborhood, yet struggling to keep your utilities turned on, or worse. Because things happen. Roofs start to leak. Appliances fail. A family member is injured or ill and out of work. Insurance covers some of these, but there’s still usually a gap that no one will cover except YOU.
So What Are the Alternatives?
They’re many and varied! Here are some of your choices.
No Down Payment Mortgage (100% Financing) Options
1) The VA Home Loan Program
The VA loan is a no downpayment mortgage available to members of the U.S. military and surviving spouses. These are guaranteed by the U.S. Department of Veteran Affairs; the agency guarantees repayment to lenders making loans that meet VA guidelines. You qualify if you meet any of these criteria:
Active duty and honorably discharged military personnel
Members who’ve spent at least six years in the Reserves or National Guard
Surviving spouses of service members killed in the line of duty
These loans have several other pluses as well. You don’t have to have perfect credit—even a bankruptcy isn’t an automatic disqualifier—and no mortgage insurance is required. And they’re a special boon for personnel stationed in high-cost areas such as California or Hawaii, in that loan amounts can go up to $636,150.
2) USDA Rural Home Loans
is a great aid those outside the military — it, too, offers 100 percent financing. This program, formally known as Section 502, is now commonly called a Rural Housing Loan. But don’t let the name deter you: it’s meant to reach “low-to-moderate-income homebuyers,” and that includes people living in suburban and small-town locales as well. Among the aspects of USDA loans are…
- Eligible home repairs and upgrades can be included in the loan amount
- A maximum home purchase price
- No surprises at closing: the guarantee fee is added to the total loan balance, and PMI is collected monthly
- Rates often lower than comparable, low- or no-down-payment mortgages—getting you into a house “on the cheap” better than any other program
Low Down Payment Mortgage Options
1) The FHA Loan (3.5% Down)
The name “FHA Loan” is somewhat of a misnomer: the FHA doesn’t actually make the loan, but it insures it—as long as the loan meets its specific standards. When a bank underwrites a loan that meets those standards, then, it has a guarantee of protection against loss.
FHA loans also have some key aspects to them that make them an especially attractive option for first time buyers or those of us who’ve hit some hard times:
- Buyers can have FICO scores as low as 500, with a reasonable explanation for the low number
- Short sales, foreclosures, or bankruptcies aren’t automatic disqualifiers (IF home buyers are part of the Back to Work program)
- Loan rates are generally 3.5 percent , except for a few FHA-approved condos
- Down payments may come from “gift funds” or even the FHA itself, which offers down payment assistance
Just as with VA loans, too, the FHA insures “high cost” area home purchases. These areas include Orange County, California; Washington, D.C.’s metro area; and the five boroughs of New York City.
2) The HomeReady™ Mortgage (3% Down)
This relatively new program is backed by Fannie Mae, available from nearly every lender in the U.S., and represents a truly innovative approach to home underwriting: it considers the income of everyone living in the house as part of the qualification process. This includes…
Parents who live with you and earn income
Children who live with you, earn income, and contribute to the household
Boarders who rent from you, even in a non-zoned rental unit, and even if they pay in cash
Although clearly designed to assist multi-generational households get mortgage approval, it’s not limited to familial connections: anyone in a qualifying area, or who meets household income guidelines, can take advantage of it.
3) The Conventional Loan 97 (3% Down)
N.B.: The Conventional 97 program was discontinued for a brief time in December of 2013, then reinstated by the Federal Home Financing Agency in 2014. This information reflects its current status.
If you’re looking to save wherever you can—and who isn’t?—the Conventional Loan 97, offering a 3 percent down payment, might be just what you’re looking for. It saves you .5 percent over the FHA loan and is offered by both Fannie Mae and Freddie Mac lenders.
As if that’s not good enough news, it gets better—this mortgage allows you to use gift money for the entire down payment, as long as the gifter is related to you. This means by blood, marriage, legal guardianship, domestic partnership, or even a fiancé or fiancée.
You can utilize the Conventional 97 with these qualifications:
- The loan must be under $424,100, even in high-cost markets
- The subject property must be a single-unit dwelling
The mortgage must be fixed rate—no ARMs
It’s worth noting that while the loan isn’t usable for multi-unit dwellings, the Conventional 97 CAN be used for refinancing a presently owned home. And there are no particular credit score requirements beyond those you’d expect to see for a typical conventional home loan.
The “Piggyback Loan”—Financing of a “Different Stripe”
Another option tucked between rock-bottom zero- or low-down-payment plans and the straightforward conventional mortgage is a unique loan with a 10 percent down payment as part of its makeup: the “Piggyback Loan.”
This form of financing, typically reserved for buyers with above-average credit, is actually TWO loans, structured in proportions of 80/10/10:
The “80” represents the first mortgage. This is a loan for 80 percent of the home purchase price, usually a conventional Fannie Mae or Freddie Mac loan offered at current market rates.
The first “10” is a second mortgage loan for 10 percent of the price. This portion is typically either a home equity loan (HELOAN) or home equity line of credit (HELOC). A home equity loan is fixed-rate, while a line of credit is an ARM. More often than not, this 10 percent is taken as a line of credit, because its flexibility is attractive to buyers over the long term.
The last “10” is the down payment, which the buyer pays in cash at closing.
And why is it called a “piggyback”? Because the second loan (the 10-percent HELOC or HELOAN) “piggybacks” onto the first, and the buyer actually finances more than a conventional 80 percent.
Attaining Your Dream…the Right Way
While it’s generally true that the lower the down payment you make on a house purchase, the more likely you are to have restrictions of some kind to fulfill—be they paying mortgage insurance, having to be a member of a specific population, or buying a home in a specific area—it’s still reassuring to realize you HAVE options other than a one-size-fits-all conventional 80 percent mortgage that may leave you cash-poor at the worst possible time.
Even if you don’t qualify for 100 percent financing, and 3 or 3.5 percent seems impossible, there’s additional good news: down payment assistance is available to buyers of all kinds. Many people don’t know that it’s out there, but buyers who take advantage of these programs receive an average of $11,000 in assistance making that “cut.” A helping hand like that may make all the difference in the world!
ALWAYS keep good records
For down payments financed by gifts, for example, you’ll need to be able to prove that the money IS a gift, not expected to be repaid, and that the amount of said gift matches the amount of money you’re designating as down-payment funds from your bank account.
Keeping a paper trail on these and other particulars ensures that not only your lender but the IRS and other taxing bodies are satisfied…which gives you peace of mind beyond price.
Purchasing your dream home may be more reachable than you think. Explore your options here!