No down payment mortgages: pros and cons

by Shawn Carvin, Senior Mortgage Banker

At first glance, no down payment mortgages seem like a great idea to help people make the dream of home ownership a reality. But it’s not quite that cut-and-dry. Before going ahead, it’s important to look at the pros and cons of zero down payment mortgages.

Pros of no down payment mortgages

• First and probably most obviously, the ability to borrow 100% of the home’s value makes it easier to buy a home without having to save for a down payment. This is a major consideration for first-time homebuyers who do not have proceeds from the sale of a previous home.
• A no down payment mortgage enables buyers to purchase a home immediately, instead of standing on the sidelines while real estate prices continue to increase. With down payment amounts ranging from at least 3.5% for FHA mortgages, up to the 20% which is common with conventional mortgages, saving a down payment can take months, if not years.
• Money spent on a down payment often depletes emergency savings. If a homeowner can hold onto thousands of dollars that otherwise would have gone into a down payment, those funds can provide financial stability in circumstances such as the loss of a job, major auto repairs, or medical expenses.
• If you’re eligible for a VA home loan, you won’t need to obtain private mortgage insurance (PMI). For most loans where the borrower has less than 20% equity, the borrower has to pay for PMI to protect the lender from any potential default.

Cons of no down payment mortgages

A no down payment loan is generally considered a higher risk for lenders, and this creates a few potential cons for borrowers.

• Lenders have found that borrowers are statistically more likely to default on a loan for 100% of the home’s value, perhaps because borrowers don’t have as much personally invested in the home. So, interest rates tend to be higher, raising monthly mortgage payments.
• Most no down payment loans require the borrower to either obtain private mortgage insurance or pay a funding fee, which is usually 2% to 3% of the amount of the loan, increasing the overall cost of the loan.
• With a zero down mortgage, it takes much longer to build to build any equity in the home. If the homeowner needs to sell the home within the first few years, there is a good chance they will walk away with no net proceeds from the sale, if not be forced into a short sale.
• Finally, since the financial crisis of 2007 – 2009, lenders aren’t as willing to take the risk on a borrower that doesn’t have a down payment. Unless you qualify for a specific program which offers a zero down payment option—like a VA loan—it’s much harder to get approved for a no down payment mortgage than it used to be.

Is a no down payment mortgage right for you?

If you qualify for a zero down loan and you can afford the payments, it may be an option for you. But it is important to fully consider all the implications when making one of the most important financial decisions of your life.