No down payment mortgage possible

While not inexpensive, it is possible to obtain a mortgage with no down payment

Buying a house is expensive. There’s no getting around that. They always have been expensive and that is not likely to change. What has changed over the years is the variety of financing that is available to those who want to buy a home. In decades past, the only types of loans that were available were traditional, 30 year loans with fixed interest rates. What made it hard to get a loan were the down payment requirements, which often demanded that the buyer pay 20% of the purchase price in cash. 

In the United States, people are notoriously poor savers, and the notion of coming up with a 20% down payment is pretty much unthinkable these days. If that requirement were still the norm, everyone would still be renting. Lenders have become more flexible in the last twenty years, and more and more loans are issued with smaller down payment requirements. In fact, it is quite possible to get a loan today without putting any money down at all.

Such loans aren’t necessarily cheap; the down payment tells the lender that a buyer is “serious.” A request for a loan with nothing down puts the lender at additional risk. As such, a no down payment mortgage will have a higher interest rate than will a loan involving a sizable cash outlay. In addition, the buyer will have to pay Private Mortgage Insurance, also known as PMI. PMI is an insurance policy that protects the lender against default. The premiums vary, but tend to average about $40 per month for every $100,000 borrowed. PMI is standard for any loan that exceeds 80% of the value of the property.

If a buyer is willing to pay both a higher interest rate and PMI, a mortgage without a down payment is certainly possible. Not every buyer will qualify; lenders offer such loans only to buyers that have good income and better than average credit. Again, lenders want to minimize their risks, so anyone with a history of payment problems will likely not qualify.

But why would anyone want to buy with no money down? The point of buying a house is to buy it; putting nothing down means more payments, more interest and possibly more time.  There are several reasons why it may make sense to put nothing down:

• The buyer doesn’t have the cash. This one is pretty common, as most people don’t save enough money.
• The buyer does not play to live in the house for a long period of time. This might be the case with someone whose job causes them to move frequently. If you have no long term plans to remain in the home, it may not make much sense to tie up a lot of money in it.
• The buyer may wish to put his or her money in other investments. If a buyer invested cash elsewhere and that investment was earning more money than the interest rate on the mortgage, it might make sense to buy with no down payment.

In the event that a loan for 100% of the purchase price is not available, it is also possible to obtain two loans - one for 80% and a “piggyback” loan for the additional 20%. While the buyer now has to make two different payments each month, he or she can generally avoid having to pay PMI.

No down payment mortgages aren’t for everyone, but they are available for those who need them.