Zero Down Mortgage Options: The Best Windows of Opportunity for New Home-Buyers - MoneyTime

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There is only a small percentage of people who truly live and enjoy the nomad lifestyle. For all others, stability is the essential keyword. Settling down and raising a family can be challenging with home-lenders changing their mind and looking to sell every couple of years. Getting a home loan is not the easiest decision either. With zero down mortgage loans though, homeownership becomes possible, especially for first-time home-buyers.

While most banks focus on offering appealing mortgage payment plans, getting approved for one without a 20% down-payment is almost impossible. Luckily, the government is backing up home-buyers through accessible zero down mortgage programs (like the USDA and VA home loans).

Yes, there are specific requirements you need to meet to qualify, but they are not as hard as one might think. And even if these don’t work out, you always have the option to access low down-payment mortgages (between 1-4%).

The best low down payment options are the FHA and Conventional 97% LTV, for example. There require only 3% and 3.5% down payments. A disadvantage one might find is that these options might require private mortgage insurance (PMI) for the entirety of the loan, which means even after you reach the common 20% equity in the home.

As a first-time homebuyer, the possibility of getting a zero down mortgage or a low down-payment home loan is definitely worth considering.

Zero Down Mortgage for First-Time Buyers

When you think about purchasing a home, the 20% down-payment is what startles you the most. And while in some states this advance payment is tangible, for a $350,000 home loan it makes up to $70,000. Consider you already have a student loan you’re trying to escape from as soon as possible, your dream of being a home-owner shatters in an instant.

This is why zero down mortgages are the most viable option on the market for people without possibilities to gather the required money for a down-payment.

While there are differences in eligibility and options, there is something for everyone:

  • USDA loan: fit for people looking to buy a house outside large metro areas
  • VA loan: given to veterans and their families for the possibility to settle down
  • FHA/Conventional 97% LTV: good for those who have the possibility to make a small down-payment and not be restricted by location

USDA Home Loans: 100% Financing, Zero Money Down

Popularly known as the rural development loan, the USDA mortgage loan has existed since 1949. Its popularity has increased in recent years due to its zero down payment and accessible credit requirements.

USDA Zero Down Mortgage Eligibility Requirements

There are two main eligibility requirements you need to comply with when accessing a USDA loan:

First, the USDA has set geographical boundaries. The USDA program focuses mainly on rural areas, but since the maps are based on the 2000 census, your chances of getting a place in the suburbs of a city you want are quite high. Checking the USDA eligibility is mandatory though, before getting your hopes up.

Second, there is a maximum household income which you cannot exceed. What’s important to know is that totaling the income is done by assessing everyone in the household.

The best example is if you have your parents living with you, their retirement income or social security benefits will count towards the total income. There are variable thresholds, depending on the state and county and the number of people in your home.

USDA Zero Down Mortgage Closing Costs & Fees

Besides the advantage of taking a zero down mortgage from USDA, they also provide the option for the seller to pay the closing costs. However, this is rarely the case, unless previously negotiated.

This is why the USDA helps home-buyers once again. Take note that this is the only loan program allowing this. If the seller does not want to pay the closing costs and doesn’t have the money to do so, their home appraisal can go higher in order to cover those fees.

Other USDA mortgage costs are a 2% upfront fee – which can also be financed into your loan. Another fee which goes towards supporting the program is a $29/month for every $100,000 borrowed, for the entirety of the loan duration.

While these costs might seem to add up and counteract the advantages of a zero down payment, the long term return of investment through great mortgage payment plans is undoubtable.

VA Home Loans: Zero Down Mortgage

A VA zero down mortgage is a special program targeting active-duty U.S. Military service members and veterans. With more than 20.4 million veterans eligible for a VA loan it is surprising to find out that no more than 57% of them own homes.

The main difference between and USDA loan and a VA zero down mortgage is that private mortgage insurance is not even required in the second one, cutting back a significant amount on your monthly mortgage payment.

Adding to that, the VA loan also has lower mortgage interest rates and less strict credit score requirements (sometimes lower than conventional loans).

VA Loan Eligibility Requirements

While the economic requirements of VA loans are quite flexible, the military service ones are straightforward:

  • 181 days or more in time of peace
  • 90 days or more during war
  • The full period for which you were ordered or 24 months of active duty (if now separated from service)
  • 6 years if in the Reserves or National Guard

At the same time, your discharge should have been for anything except dishonorable reasons. The program also targets unremarried spouses of veterans MIA or killed during their deployment and service-connected disability discharged veterans.

VA Zero Down Mortgage Closing Costs & Fees

The VA zero down mortgage has similar benefits to the USDA one:

  • It enables seller-paid closing costs
  • The 2.15% upfront funding percentage (to help cover the costs of the program) can be added to the loan principal, reducing the need for up front cash.

Some might think that only these two programs are helpful to first-time buyers having restrictive requirements at the same time. However, they do cover a large percentage of the American population, enabling, for example, recent graduates still paying for their student loan to settle down and create a family.

FHA Home Mortgages: Low Down Payment, 3.5% Down

While this option is not a zero down mortgage, in some cases it comes pretty close to it. The Federal Housing Administration offers mortgages with only 3.5% down payments. This can seem like a lot for a $250,000 house. But advantages appear here as well. You don’t have to pay the amount, as the FHA offers the possibility for someone else to pay it for you, as a gift:

  • Family members
  • Fiancee
  • Non-profit organizations
  • Other eligible sources

At the same time, they have an interesting program, called the Good Neighbor Next Door. Several public employees categories (police officers, teachers, doctors, firefighters, etc) can apply for it. While this program is not an FHA zero down mortgage, your advance payment can drop to just $100.

FHA Loan Eligibility Requirements

Compared to other government-backed loans, there are no special requirements enforced by the FHA for their loan programs.

Even more, their credit score guidelines are quite flexible compared to other low-down payment mortgages:

  • Credit scores >580: eligible for 100% financing
  • Credit scores 500-579: eligible with a 10% down-payments
  • DTI (debt-to-income) ratios can be as high as 31% to go towards:
    • Mortgage principal
    • Property taxes
    • Interest
    • Private mortgage insurance costs
  • And the overall DTI can even reach 43% of your monthly income

FHA Loan Closing Costs & Fees

As with VA and USDA zero down mortgages, the FHA also allows for seller-paid closing costs.

Compared to them, though, the FHA loan program has a mandatory PMI (private mortgage insurance) you need to contract through FHA- “mortgage insurance premiums (MIPs)”:

  • Upfront cost: 1.75% of the mortgage value – which can be added to the monthly payment plan (increasing your monthly mortgage payment rates, though)
  • Annual MIP – 0.85% is the average

Buying a Home with Zero Down Payment: It’s Possible

While getting a zero down mortgage is definitely achievable, preparing yourself for some costs is mandatory, as you might need to pay upfront fees or closing costs yourself.

zero down mortgage

Get the word out there. Tell your family and friends about your plans. Let them now your dream of becoming a home-owner and tell them you set up a fund where they can pitch in, for you to reach the needed amount. Most loan programs allow gift funds to cover closing costs.

Second mortgages. While your zero down mortgage enables you to avoid down payments, sometimes you need and can access a second mortgage to pay for your 1st one’s upfront fees and closing costs.

Sometimes sellers really want to get their cash in. And the discounts they are offering can become seller credit. This translates to a percentage of the home’s initial costs, between 3% and 6% which counts as closing costs instead of being added to the principal.

Credit Cards: While we don’t necessarily recommend this option, sometimes it can be your only one. Provided you have a good credit score, you can use funds from a credit card to cover closing costs. Just make sure to not go over the required DTI ratio and to pay the amount back on time and avoid those hefty interest rates.

Why Lenders Still Offer 100% Loans

Even if zero down mortgages are a dream for all, it has been proven that when we receive something without investment, we often tend to lose respect or commitment towards that specific “gift”.

Statistics have shown that mortgages which require a down-payment increase the chance of the owner to keep his commitment and lower the chances of borrower defaulting.

While you often think a bad credit score is the bane of all loans, most lenders tend to look at the possibility for a borrower to pay a higher down payment in order to bend the rules and approve their loan. We all know, it’s harder to save money than it is to pay back debts.

So, while there are these zero down payment programs available and some programs offering a low down-payment option, remember they come with additional strings attached. Some offer private mortgage insurance, which raises your monthly mortgage payment costs. They are also required, because lenders need to have some type of insurance in order to maintain their business.

Zero-Down Home Loans Available in 2019

Those living in a financial bubble might think that purchasing a home with zero down mortgage is something useless. If you ask the millions of US citizens who have benefited from these programs since 1949, though, you might hear a different opinion. Getting accessible mortgage payments and flexible, low-rate private mortgage insurance premiums is not a favor. It is what lenders need to think of more often if they want to fully restore the true glamor of the real-estate market.

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