Zero-Down Payment Mortgages

Private mortgage insurance and other creative financing options available today have made it possible for borrowers to finance 100 percent or more of the home’s value. Lenders offer this type of loan because property values tend to increase and the appreciation can help offset the risks associated with a borrower who has no initial equity invested in the property.

Lenders further mitigate risk on these loans with tough underwriting standards that require borrowers have a very good credit score – one that is at least 700 – and whose debt-to- income doesn’t exceed the standard 26/38 rule.

Zero-down payment programs can be attractive to first-time homebuyers who’re short on cash, buyers purchasing a second home who want to keep their initial investment low, buyers who’d like to spend their savings on home improvements or some other expense, or buyers who plan to roll existing debt into the home mortgage and capitalize on its low interest rate and tax deductible status.

One of the pitfalls associated with these loans is required private mortgage insurance (PMI). The insurance cost can add hundreds of dollars to the monthly mortgage cost. PMI and down payments have an inverse relationship – the lower the down payment, the higher the PMI. Interest rates on the zero-down loans also can be higher and lenders tend to stick with the 26/38 debt-to-income ratio.

Another no-down payment option includes using “gift” down payment assistance that can be provided by nonprofit groups, such as AmeriDream or Nehemiah, relatives or some other source that can gift the funds. The small down payment can be used to apply for a FHA loan, which allows for all of the down payment funds to be gifted. Higher mortgage interest rates can be associated with these zero-down home loans. Check with a mortgage professional who’s experienced with all of the loan programs on the market, he can help you determine which program may be best for your financial situation and long-term goals.