No Down Payment Mortgage Loans

During difficult economic times many consumers seeks creative ways in which they can save money on their mortgage loans. While a homeowner may feel that they can easily afford a monthly mortgage payment, the prospect of coming up with thousands of dollars in closing costs often leave many people just short of realizing the dream of home ownership. Mortgage deals typically include a significant down payment and this is often prohibitive for many young families or homeowners who find themselves short of readily accessible lump sums of cash. In these cases, no down payment mortgage loans can make the difference between owning a home and continuing to pay rent month after month.

Mortgage down payments are necessary buffers used by lenders to protect themselves from the costs of foreclosing a property in case of loan non-payment. A 20% down payment is considered sufficient protection, and is therefore the industry standard. Any amount less than that will require some creative financing and workarounds, but not to worry, some workarounds are quite standard.

One option for obtaining zero down mortgage loans is to utilize private mortgage insurance. Private mortgage insurance techniques can be quite effective, but are not popular with consumers who do not want to tack on any additional fees to their monthly mortgage payment. Basically, private mortgage insurance secures the lender’s investment in the event that the consumer defaults on the mortgage loan. A down payment reduces the lenders’ risks and private mortgage insurance works in the same manner. Consumers can typically expect to pay about 1 percent of the loan value at the time of closing and around half a percent for every year private mortgage insurance is applied to the loan, however PMI payment plans can vary. PMI will then be paid until the equity in the property reaches 20%, and will therefore raise the homeowner’s costs until that time. While private mortgage insurance does require some money up front, it won’t be nearly as much as a 20% down payment would have been without the PMI.

Another way to get 0% financing is to take advantage of 80/20 loans. Through 80/20 loans, homeowners are able to finance 80 percent of the home loan on a first mortgage, and essentially finance what would have been the 20 percent down payment through a second mortgage taken on the same property. This strategy allows homeowners to obtain 100% financing, while avoiding having to pay PMI. The second mortgage, however, does come at a higher price. Since second mortgages are riskier because in case of foreclosure, the first and main mortgage takes precedence to any property claims, they do carry higher interest rates. However, in many cases the extra interest is still less than PMI.

Veterans are also automatically eligible for no down payment mortgage loans through the Veteran’s Administration. In most cases, the VA will charge a small funding fee to guarantee the loan, but again, this is usually minute compared to a down payment.