Understanding No Down Payment Mortgages 

 

No down payment programs can be a good idea for first time home buyers, people buying a vacation property, or those who could better use the money for other purposes.

Up until about 20 years ago, the average down payment  for a house was 20%. Now, it’s common for people to put down only 5%. New loan programs introduced by mortgage lenders even allow you to make no down payment on your new home purchase.

These programs are known as zero-down or no down payment mortgages. This means that you are financing 100% of the value of the home. Lenders introduced this type of loan because property values have historically risen, which helps homeowners create equity in their home. While no down payment mortgages can be a little more difficult for lenders, they are able to finance 100% of the purchase price. Lenders are now better able to review a client’s entire profile which helps ensure they are a safe risk.

Who Is a No Down Payment Mortgage For?

For some people, putting no money down on a house may be the only way to buy one. And there are several advantages for some borrowers to get a no down-payment mortgage. First-time home buyers may not have enough saved up for a 20% down payment or might want to use the money they’ve saved for other uses like buying furniture or other necessities for their new home. Other possibilities are that they may have found a home and want to lock into it now before the home appreciates to where they can no longer afford it. Or they just don’t want to wait because the sooner they get into the house, the sooner the appreciation value belongs to them.

Also, people who are buying a vacation home may not want to put money down because they might want to avoid tapping into their savings or investments. For them, a no down payment mortgage can be an attractive option.

Some might even need the money they save for other purposes such as paying off debt; or they might have a child who is about to enter college and need the money for their child’s tuition. A no down payment mortgage can also help those who need to consolidate debt. It makes good financial sense because mortgage interest is tax-deductible and rates are lower than most credit cards.

Avoiding PMI With No Down Payment

However, the disadvantage to a no down payment mortgage is paying private mortgage insurance , or PMI. Anyone who puts down less than 20% of the home’s value might pay PMI, depending on the loan program they choose. But there are ways to avoid this:

Some mortgage lenders are willing to give you what’s called a piggyback loan, or an 80/20 mortgage, to avoid PMI. Borrowers get a first mortgage for 80% of the value of the home, then a second mortgage  (a home equity loan) for the remaining 20%, which avoids PMI. The value of this is the interest on the second mortgage is tax-deductible while PMI is not.

Borrowers that meet certain criteria can eliminate PMI after they’ve reached a predetermined level of equity in their home. This amount varies depending on the type of loan, but it is commonly between 20% to 22%.

Lenders are required by law to cancel PMI when the homeowner has reached 22% equity in their home if the loan was closed after July 29, 1999. However, once 20% equity is reached, the homeowner may make a request to their mortgage lender to cancel PMI. Otherwise, the homeowner may end up paying for PMI during the time it takes to reach 22% equity.

There are other ways to get a 20% down payment you may not have thought of. For instance, some loans allow for down payments to come from sources like monetary gifts from relatives or employers. Other ways of coming up with a down payment might include drawing from a trust fund or a retirement account, or using money you inherited.