No down payment loans are a newer loan program being offered by many lenders today. Also known as 100% financing, there are many misconceptions about what 100% financing means, or who can qualify for it. There are also times when this loan may not be the best option for a buyer. Often the interest rates or payments work out to be higher than if other loans can be done. It is important that you examine your options thoroughly before you make a choice. Everyone has their own unique needs. The of loan program you choose should be based on your current financial situation, the length of time you expect to live in the home and with keeping in mind your overall financial plan for the future. Be sure to ask your mortgage professional (click here to find out about picking your broker/banker)
What kind of loan do you want? A no down payment loan can be structured using a combination of loan programs or by using a single loan program. For example, some lenders will allow a borrower to use a single loan program and finance the entire loan amount in a first mortgage. Other no down payment programs break the loan amount into two loans. This is one way to avoid mortgage insurance. For example, you might choose an 80% loan to value first mortgage and then a 20% loan to value second mortgage. Other loan packages can have different combinations such as a 90% loan to value first mortgage and a 10% loan to value second mortgage. There are benefits to different loan options based on what your future plans are. Your mortgage broker/banker should be able to explain the differences for all options, as well as the benefits of every option.
Reasons for using the 100% financing option If you have an excellent income and have been unable to save money for some reason in your recent financial past or you are just starting out in life, make an excellent income, but have not yet had time to save, then zero down may be an excellent alternative for you rather than waiting a year or two to save for a down payment. Perhaps your situation is such that you have been able to save moderately and can afford to pay for buyer’ s closing costs, however, do not have enough put away for both a down payment and closing costs, zero down will allow you to buy a home now, enjoy the benefits of home ownership and enjoy potential appreciation over time.
Is 100% Financing right for you? Some people are in a situation where 100% financing is the right way to go for them. If you make a good enough income, but have not saved money due to time constraints (or just because you are bad at saving) it can be a wonderful option for you. A negative, as mentioned above, is that you tend to get a higher interest rate for the loan. This can definitely be offset by the fact that you can buy a house with little or no money to put down!
Do you really need 100% financing? Many people think they need 100% financing because they don't have a lot of money in the bank. Many times there are other options or even money that is located or attainable by other methods that you, as a home buyer, never thought of. You may have a family member willing to either give or loan you some money towards the purchase of your new home. Do you have a retirement plan through your employer? Many retirement plans offer you the ability to take a loan against yourself with no penalties. Ask your mortgage broker/banker about these and other options.
100% Financing does not cover all the expenses of closing a mortgage. When you look for 100% financing, this in itself is not going to allow you to purchase a home without any money of your own. The 100% covers all of the purchase price. So as an example, if you bought a home for $200,000, you would be borrowing $200,000. This does not cover the thousands of extra dollars in total settlement charges. The expenses of the lender, the attorney, recording fees, etc. all still have to be paid. These amounts can reach 2-3% of the purchase price or more, so make sure you pay attention to these! If you don't have the money, don't despair- there is always a solution. For instance, you could.....
Let the seller help you!!!
On excellent way to structure a zero down payment home loan is to have the seller of the home pay for your down payment and closing costs. For example, you could finance 95% of the transaction, have the seller contribute the other 5% and also pay your closing costs, essentially putting you in a position to get into a home for zero down payment and zero closing costs. Market conditions in your local marketplace will determine if this plan is a viable alternative.
OR Try to see if there are down payment assistance programs available with the city you are buying in. Many cities and towns have programs in place to assist you in buying a home in their town. With the increases in property prices, many of these programs won't give you enough to put a lot down, but they are a great source for money towards closing costs. Many of these programs are either lower interest rate loans, or forgivable debts if you stay living in the house for more than 5 or 7 years.
