Zero Down Home Loan
A zero down home loan allows borrowers to purchase a home with 100 percent financing. Financial institutions, such as banks, mortgage lenders, or credit unions, are willing to lend to borrowers that are considered low-risk. A low-risk applicant is considered to have a very high credit score, low debt-to-equity ratio, high income and / or assets. Financial institutions offer zero down home loans to only low-risk borrowers, since the borrower is not putting any of their cash towards their home. Not having a down payment causes more risk, since the borrower doesn’t have any financial interest in the home.
A zero down home loan does have higher costs, such as a higher interest rate based on the home loan. The financial institution may also include points within the loan origination fees. This means the borrower will have to pay more money when it’s time to close on the house. Both an increase in interest rate and / or mortgage points can increase a borrower’s lending costs, so they must be factored in when determining if a zero down home loan is right for you.
A borrowers default risk increases as their loan-to-value ratio increases. The conventional loan requests that borrowers have 20 percent of the total value of the house interested in purchasing. The other 80 percent can be borrowed from their mortgage lender. This is considered the 80-20 rule and is the type of conventional loans that many lenders use to lower their lending risks to borrowers. Borrowers will still offer a zero down home loan, but they will charge a bit more to lending. A higher loan-to-value will cost extra to compensate the lender for an increase in potential default risk. Besides lending points to originate the loan, other points can be charged to buy down the interest rate or to pay for the increase in lending risks.
VA Zero Down Home Loans
The Department of Veterans Affairs zero down home loan program doesn't require any down payment, eliminates the need for private mortgage insurance and usually offers lower interest rates. However, there is a funding fee of 2% to 2.75%. Only veterans and service personnel are eligible for this program, which provides up to $240,000 to buy or build a home. Loans are available through VA-approved lenders.
VA home loans are to assist eligible people on active military duty or retired status to buy primary residences. Veterans continue to reap the financial benefits with 100% financing for primary residence real estate transactions. VA mortgage loan eligibility guarantees that active military and veterans can buy a home with no money down. These no down payment loans are one of the last of the zero down loan programs.
Zero Down Home Loan Alternatives
There is an alternative view that is common with real estate investors. Zero Down can also mean that the borrower doesn’t use any of their own cash as the down payment, but they use a money partner who puts up cash to make the deal work. The investor could refinance another property and use the cash from that refinance to use as the down payment on the new property. The seller may even offer some of the financing to reduce the down payment (carry back second).
80-20 Zero Down Home Loan
Borrowers that don’t have 20 percent to put down on a loan can consider a 80-20 loan where the 20 percent is a home equity line of credit. This will allow the borrower to purchase a house without having the place any down payment. This zero down home loan takes 80 percent of the home value and used the other 20 percent as a home equity line of credit loan.
Most banks offer special mortgages to low- and moderate-income borrowers because certain federal regulations require financial institutions to provide a certain share of business to these economic groups. But no- and low-down options for jumbo loans (higher than $300,700) are harder to find.
Zero down Piggy Back Home Loan
Another option is a piggyback, or 80/10/10, mortgage, which avoids private mortgage insurance. Borrowers receive a first mortgage, usually for 80% of the home value, then a second mortgage or home-equity line of credit for 10%. But the buyer has to come up with the remaining 10%. Some lenders are willing to provide up to 20% for the second mortgage to eliminate the need for a down payment.
To qualify for a piggyback or zero-down loan, borrowers must have good credit and strong income. Some savings are often required, but lenders often relax debt-to-income ratios.