Robert PinzhofferPresident / CEO
Low Down Payment Loans
Why We Still Offer 100% Financing Loans?
Many new homebuyers wonder why most types of loans require a down payment. Why can’t the bank just finance 100% of the home’s purchase price?
It all comes down to the fact that the bank, lender, or investor wants to be paid back. After many studies, banks and lending institutions have determined that the higher the down payment on a loan, the lower the chances of the borrower defaulting. In fact, down payment amount is more important in determining risk than even credit score. That’s why, years ago, the standard down payment amount became 20%. Anything less than that required some kind of insurance, such as private mortgage insurance (PMI), so the lender would get their money back if the borrower failed to pay the loan back. Fortunately, there are programs for which the government provides insurance to the lender, even though the down payment on the loan is zero.
Here are a few of these loan types:
100% Financing: The USDA Home Loan
The USDA mortgage loan has been around for years, but it has become more popular recently because it requires zero money down and has lenient credit requirements. It may sound too good to be true, but it’s a legitimate mortgage program that over a million home buyers have used since 1949. The USDA loan is a government-sponsored loan that exists to help develop rural communities by encouraging home ownership. That’s why this loan type is also known as the rural development loan. To qualify, you have to have enough income to support your house payment, but not too much income. You have to be within limits set by USDA.
You also must buy a home that is within USDA’s geographical boundaries. Although the program targets rural areas, many eligible areas are suburban. You would be surprised at how accessible major cities are from USDA-eligible areas. The USDA mortgage even allows the seller to pay your closing costs. This means you don’t have to come up with a down payment, nor do you have to pay costs of opening a mortgage if the seller agrees to pay them for you. With the USDA loan, it could be cheaper to move into a home you buy than to rent the same house. There is a 2% upfront fee which can be financed into your loan amount and doesn’t have to come out of your pocket. The USDA also charges $33.33 per month on every $100,000 borrowed as an ongoing fee to make the program viable for future home buyers. Even with these added costs, USDA loans are a great opportunity to break into homeownership with little upfront costs, and fairly low monthly costs, considering the low interest rates available for this program.
100% Financing: The VA Home Loan
Another mortgage loan that allows you to finance 100% of the home’s cost is the VA home loan. This loan is available to applicants typically with at least two years of former military experience, or 90 days if still serving. The Veterans Administration estimates that 23 million people in the U.S. are eligible for the VA home loan. That’s about one in every 13 people, and many don’t even know they’re eligible. Anyone who is eligible should take advantage of this zero down home loan program. VA loans have very low rates – usually even lower than conventional loans. And they don’t require a monthly mortgage insurance fee like USDA, FHA, or conventional loans. When compared to any other low down payment mortgage, VA home loans are the most affordable – in upfront as well as monthly costs. With a VA loan, you can buy a home with zero down and have the seller pay some or all of your closing costs, meaning you could own a home with no money out-of-pocket. Lenders typically allow lower credit scores on VA loans sometimes as low as a 550 Score.
Did You Know FHA Home Loans Can be Zero Down Mortgage Loans
Federal Housing Administration, or FHA, loans require a 3.5% down payment, which can be quite a lot of money. On a $300,000 home purchase, that’s $10,500. But, there is a somewhat obscure FHA rule that allows you to get around this requirement, in a way. According to FHA guidelines, you can receive a gift for the entire down payment. The gift can be from a family member, non-profit organization, fiancé, or other eligible down payment gift source. That means you don’t need any of your own money to buy with FHA, if you can find a source for the gift. So while the loan technically needs a down payment and is not a 100% loan, the effect is the same. If you have a gift source, you don’t have to come up with anything for the down payment.
First time homebuyers receive down payment gifts more often than you might think. There’s a chance that you know an eligible donor who could help you with all or part of the down payment. Another FHA niche offering is the Good Neighbor Next Door loan. Teachers, police officers, and some other public employees can buy a home with just $100 down. That’s not quite 100% financing, but very close to it.
A Word about Zero Down Loans and the Closing Costs Involved
One point I like bring up when talking about zero-down loans is that you need to think about closing costs. Every time a mortgage loan is opened, there are costs associated with it, such as the appraisal, title, loan processing fees, mortgage points, and more. Someone has to pay these fees. Typically, it’s the buyer’s responsibility to pay most of the closing costs. That could range anywhere from $2,000 to $5,000 or more. That’s why some first time home buyers are surprised when they have to come up with a few thousand dollars, even when getting a 100% mortgage loan. But there are ways to get around this expense. The most common way is to receive a closing cost credit from the seller.
In some cases the seller will offer closing cost assistance as an incentive for buyers. It costs the seller money, but increases the chances that the home will sell. Talk to your real estate agent about requesting closing cost assistance. It’s not always available, but when it is, it’s a great help to those buying with a 100% financing mortgage.
Zero-down financing is alive and well. If you know about the special programs available, you can buy a home with nothing down. To get started, speak to a lending professional who specializes in 100% mortgage loans here. Get a pre-approval for your loan so you can start shopping for a home. In 30 to 60 days, you could be moving in to the home you bought with little or no money out of your own pocket.