Today, you may find it difficult to find zero down payment mortgages. Even the ones you can find are available to those with proof of income. In addition, they must have a credit score of at least 720. As a matter of fact some lenders may require a higher credit rating. You can get more details from a good mortgage broker. In this article, we’ll look at some loan options and some alternatives. Read on.
VA loans
Veterans and military families can go for a VA loan. This type of loan is characterized by 100% financing. With this insurance program, you can get loans up to a certain limit, which is $424,00 in most cases. These loans do not require any down payment but mortgage insurance can be part of the loan. The qualifications of different vendors for the loan are different. In general, your debt-to-income ratio should be around 41% for a loan.
USDA Rural Development Housing Loans
If you live in a designated area, you may qualify for the USDA Rural Development Housing Loan. These loans are intended for residents of remote areas, and you may qualify for these loans if you live in a nearby town.
Your minimum credit score must be between 600 and 640 for this option. Besides, the loan guarantee offered is encapsulated in the loan balance. Therefore, there will be no need for cash at closing.
Federal Navy Loans
The Navy Federal Credit Union provides 100% financing to qualified members who want to purchase primary homes. However, the downside is that only military personnel and their family members can apply for the offer. This program is similar to the VA program except that it features a lower fee of 1.75% for funding.
When should you not go for no down payment mortgages?
If you ask your mortgage professional, they will tell you that it is important to keep in mind that these plans have their own set of drawbacks. For example, if you finance all home purchases, keep in mind that you won’t have any ownership in the home. As a result, lenders may consider you a very risky borrower. Therefore, they may require you to obtain private mortgage insurance before signing the loan.
Keep in mind that if you default, it will cost you between 0.5 and 1% of the loan amount annually. Unlike mortgage payments, these expenses will not be considered tax deductible.
Oftentimes, no down payment mortgages have a higher interest rate than traditional options. The reason is that lenders offer the best terms to those who can afford to make a down payment.
Alternatives to No Down Payment Mortgages
If you do not qualify for no-pay programs, you can check out the following alternatives. But be sure to discuss it with your mortgage professional first.
local loans
Almost all counties, states, and municipalities offer different types of incentives to homebuyers. They include down payment assistance, low interest rates, closing cost assistance or a combination of these.
Also, many of these are restricted to buyers who meet specific income levels while others are only for first time buyers. Apart from this, some programs can cater to specific groups, such as teachers and medical professionals.
Although not all of these programs can be the perfect replacement for a down payment, be aware that some of them may offer interest-free loans or grants that may cover part of the down payment.
FHA Programs
For these programs, you must pay at least 3.5% in advance. However, according to FHA guidelines, the down payment must be funded in the form of monetary gifts from various sources, such as nonprofits, fiancés, or relatives.
Likewise, the FHA also offers another great program called Good Neighbor Next Door for public employees, such as offers for police and teachers. The good thing is that the down payment is only $100.
Mortgages on the back
For this strategy to work, you need to take out two loans. The first is to cover 80% of the home purchase price, and the second is to cover the rest of the price. Before the subprime mortgage crisis, the common practice was an 80/20% split.
Today, on the other hand, things are tough. Therefore, the maximum would be a plan that includes an 80% / 15% / 5% loan. In this case, you get an initial mortgage to finance 80% of the purchase, while you take out a home equity loan or other mortgage to cover the rest. The remaining 5% is covered by a down payment.
Wait and save
Another viable option is to put off your dream of owning a home until you can make a down payment. In fact, if you try hard, you can save up enough money to make a down payment. This is especially true if you have already set aside some money.
For example, you can withdraw up to $10,000 from an IRA, especially if you’re a first-time buyer. The good thing is that you don’t have to worry about the 10% early withdrawal penalty.