The down payment for a mortgage can be a prohibitive factor for many people hoping to purchase a home, but it doesn’t have to be. Many potential homeowners still expect to have to put down 20% (that’s $40,000 for a $200,000 home), which is not an option for many (in the 1940s, it used to be 50%!), but over the years, many different low-to-no down payment options have been created, making it possible for most people to buy a home that want to.
Below are some common loan options/strategies for “Zero down” mortgages, listed in order of which I think are the best options.
VA Loans
These loans are meant for borrowers (or spouses of borrowers) who have served time in the military. Note that you do not have to be a war veteran to get a VA Loan! You just need to have finished your stint (even it’s the Reserves or National Guard) and not have been dishonorably discharged:
Pros:
· No down payment required, for both purchases and refinances
· NO MORTGAGE INSURANCE! This is a huge advantage over other 0-down mortgages
· Often higher loan limits than other 0-down mortgages (you can buy more house)
· Rates are normally significantly lower than conventional mortgages
Cons:
· You have to have been in the military (but again, the requirements are very broad)
· There is a Funding Fee added to the loan. This is anywhere from 0-3.3%, depending on the nature of your time in the military, but it does not have to be paid out of pocket.
USDA Loans
Sometimes called rural loans, these loans are meant for borrowers that are willing to live in areas that USDA considers “rural”, which in Utah is essentially south of Spanish Fork, north of Ogden, west of Bingham Canyon, and east of Provo.
Pros:
· No down payment required, for both purchases and refinances
· As with VA loans, NO MORTGAGE INSURANCE! This is a huge advantage over other 0-down mortgages
· Rates are normally a bit lower than conventional mortgage rates
Cons:
· You pretty much have to live outside of the Wasatch Front, but areas like Heber, Payson, Eagle Mountain, Tooele, and Brigham City are all currently considered rural by USDA.
· There are income caps, based on the county, family size, etc. They are not meant for rich borrowers. The credit requirements are a bit higher as well.
· There are loan limits (based on the county) that are normally lower than other loan types, so getting a $400,000 could be difficult.
FHA loan with local grant programs
FHA loans normally require the lowest down payments, but they still require something (3.5%, or $7000 for a $200,000 home). Grant programs exist both on the state and county levels that will pay that 3.5% for qualified borrowers, making it so that the borrower doesn’t need to come in with a down payment.
Pros:
· No down payment required (purchases only)
· Only 1 loan (other no-down-payment FHA options require 2 loans)
· Lower average rates than other FHA no-down-payment loans and conventional loans
Cons:
· As with USDA, there are income caps
· There are lower loan limits than normal FHA loans as well as restrictions on the property type
· It’s an FHA loan, so you will have mortgage insurance.
FHA loan with a small 2nd mortgage
This is probably the most common no-down-payment mortgage option. A government “grant” is given that allows for a 2nd mortgage to take the place of the 3.5% down payment. There are variations of the program for first-time home buyers, previous home buyers that had a bankruptcy/foreclosure, and even a conventional mortgage option that doesn’t carry mortgage insurance.
Pros:
· No down payment required (purchases only)
· The program is pretty established and the government grant is large, so it’s fairly easy to qualify for.
· Fewer restrictions on income and loan size, compared to the previous option
Cons:
· You’ll have a 2nd mortgage with a higher interest rate on top of the FHA 1st mortgage
· Again, since it’s FHA, there is mortgage insurance (and the 2nd mortgage payment)
· The interest rate is normally a bit higher than if you had an FHA loan without the 2nd mortgage.
· There are stiffer credit requirements.
Gifted down payment
This is not a loan program as much as it is a strategy. FHA loan programs- and now even Conventional loans- allow a parent, family member, friend, or even an employer to give you the funds to cover the down payment.
Pros:
· No down payment (from your pocket, at least!)
· Far fewer restrictions on what type of loan you can get (get something without mortgage insurance)
· Work with friends/family instead of a government entity for the down payment (which can be easier and faster)
Cons:
· You need generous family members, friends, bosses, etc.!
· The gifted funds need to be “sourced”, which means there needs to be proof that the funds actually belong to the “gifter” and they are legitimate (no money laundering).
Bottom Line
To be clear, having a down payment usually gets you more favorable loan terms and always reduces the size of the loan, giving you lower mortgage payments. However, the benefits of homeownership, even if terms are slightly unfavorable because of a no-down-payment mortgage, far outweigh the disadvantages. In short, not having a down payment should not and WILL NOT keep you from owning a home!
