It used to be be that no sane responsible adult would commit to buying a house when he has little or no cash for a down payment.
So much so that as long as a home buyer has more cash on hand, the bigger down payment he would put down… even if it’s more than 20%.
But as the years go by, the general public’s appetite for risks has risen exponentially.
These days, if someone declare in a social gathering that he has paid over 20% for down payment, he would probably be met with shocking eyeballs.
In fact, there is a rising trend of home buyers paying lesser down payment.
But since going below 20% down payment would make a borrower obligated to buy private mortgage insurance (PMI), many feel that a borrower who has gone below that threshold might as well go all out and obtain 100% financing.
This downward spiraling trend has led to the average down payments in the real estate industry being less than 10%.
However, more and more people are going for mortgages with 100% financing.
Some even up to 125% financing! That means a loan of 125% of the appraised property value!
This types of loans, usually found in the sub-prime market, are called zero down, no money down, or no down payment.
As they literally imply, these types of loans have no cash requirement from the borrower and offer full financing of a property transaction.
While this can seem very risky on the part of lenders, who are we to tell them how to run their lending businesses.
The truth is that lenders have gone through the numbers and find it safe enough to offer zero down mortgages. Should they find that a particular borrower is of a credit profile they are comfortable with working with, then a loan can be approved.
But outside the sub-prime market, VA mortgages actually requires no down payment as well as long as certain criteria are met.
Should you take a zero down home loan?
This is really one of those questions where the answer starts with “it depends…”.
If you don’t have the cash for down payment, then these loans are probably your only options.
Yet these loans does not necessarily cater only to borrowers who are broke.
Sometimes people have the money in the bank but need to keep them untouched for one reason or another.
It could be cause the money is their children’s college fund, maybe the money is saved for remodeling expenses, maybe they are meant for retirement, etc.
To discover with signing up for a zero down loan, one has to weigh out all the decision factors and determine what’s more important.
The higher interest rates and closing costs with these loans should be a primary factor to put in that decision making process.
Another option which should also be considered are piggy back mortgages.
This helps the borrower obtain 100% financing while avoid the scrooge that is PMI.
For piggybacks, the second loan will usually have a much higher interest.
Then there is the creative world of seller financing to ponder over.
These deals are a form of creative financing that enables a buyer to leverage on the seller to fully finance the purchase.
For example, a borrower might take up a traditional mortgage from a lender, and have the seller serve as his second mortgage.
Do be mindful not to step into the world of creative financing if there is no experienced investors to guide you.
The bottom line
It is without doubt that one can buy a house with no money down in America.
This is even when the borrower has a horrendous credit score, was a bankrupt, or no income.
The thing is that no money down home loans are often a last resort for desperate home buyers.
And they come with very expensive costs.
So if you have the funds for down payment, or a lender offers you a choice of down or no down, one needs to ask himself whether paying such exuberant fees for a mortgage is really worth it.
Conventional wisdom is to pay the down payment if a borrower has the required cash.
Even borrowing short term loans from friends and family might be worth it as long as you are confident of repaying them in the near future.
The savings will be more than worth it.
Anyway, if you are not convinced that you would be able to pay back loans borrowed from family and friends, what makes you think you would be able to repay a lender who has granted you a zero down mortgage?