No-down-payment mortgages could be a good solution, but only for certain types of buyers, experts say. Getty Images
Rising home prices and current high mortgage rates have made buying a home prohibitively expensive. “Home affordability today is the worst it's been since the early 1980s,” says Neil Christiansen, branch manager and certified mortgage advisor at Churchill Mortgage.
Meanwhile, inflation and high interest rates are making it harder for many would-be buyers to save up for a down payment: The average US home would require about $88,000 for a 20% down payment, according to data from Redfin.
However, you don't always need to put down 20% when buying a home. In some cases, you may not need any money down at all. While not as common as traditional mortgages, no-down-payment mortgages do exist and can be useful for some prospective buyers. However, these types of mortgages may not be right for every situation.
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When does a no-down-payment mortgage make sense? Experts weigh in
People who qualify for a no-down payment mortgage and can afford the monthly payments may benefit from not having to come up with a large amount of money up front.
“No down payment mortgages can be a great option for qualified borrowers who don't have the means to save for a down payment but have a steady income. This option may make sense for homebuyers with limited liquidity but who can comfortably afford the monthly payments and other costs of homeownership like insurance, property taxes and maintenance,” says Chris Burke, vice president of mortgage lending at Veterans United Home Loans.
If you want more money to invest outside of just investing in real estate, a no down payment mortgage can also make sense.
“There are some zero-down-payment loan programs available, but in today's high-interest-rate, high-price environment, it may be difficult for buyers to get approved,” Christiansen says.
But if you can qualify for a mortgage, Christiansen says you could potentially increase your net worth by investing the money that would have gone toward a down payment in stocks, bonds or other assets.
One mortgage option with no down payment is the Department of Veterans Affairs (VA) loan.
“For many veterans and military members, VA loans offer a sure path to homeownership with no down payment required. Last year, nearly three-quarters of VA buyers purchased a home with no down payment,” Burke says.
“Another option is the USDA loan, which is available in qualifying rural and suburban areas and offers a no down payment mortgage option,” he added.
It's possible to find private mortgage lenders that offer no-down-payment mortgages, but they're likely to be structured like a combination of a government-insured low-down-payment mortgage and another loan to cover the remaining down payment amount.
Whatever its origin, not making a down payment can be advantageous for some buyers if they can live with the mortgage terms. For example, if you have a steady income, a good credit score and a low debt-to-income ratio, not making a down payment can be a smart choice, experts say.
In today's tough housing market, buying early can be advantageous, as you may not have the opportunity to save up for a down payment. However, obtaining a no down payment mortgage usually requires a solid borrower profile and a good credit history.
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When does a no down payment mortgage not make sense?
Although no down payment mortgages have their advantages, they also have some disadvantages that you should consider first.
“Stories about no-down-payment loans seem to be rife on the Internet. It's not a new product, and it's not widely available,” says Kevin Leibowitz, a mortgage broker and founder of Grayton Mortgage Co. He adds that the terms of these loans are a bit too restrictive.
For example, in addition to the difference in loan amount, your monthly payments may be higher than with a conventional mortgage because no-down payment mortgages often have higher interest rates and require private mortgage insurance (PMI), both of which can result in higher monthly payments.
Also, having no equity in your home is risky. If property values in your area go down, your home could go bust. If you owe more than your property is worth, you could run into problems, such as difficulty moving or refinancing your mortgage. So you might not want to take the risk.
“If a homebuyer's financial situation is unstable or they're not prepared for the long-term financial burden of homeownership, it may not be the best choice. Prospective homebuyers struggling with high debt or an unstable income may find the added financial responsibility of a mortgage without the cushion of equity unmanageable,” Burke says.
“Plus, in competitive markets, sellers may prefer offers with a down payment because they believe they are more financially stable with one,” he added.
Other low down payment mortgage options to consider
While no down payment mortgages are appealing, there are other ways to buy a home without making a large down payment.
“Both conventional and FHA loans offer low down payment loans, with conventional loans offering 3% for first-time homebuyers and FHA offering 3.5% for first-time and existing buyers. If you go with conventional financing and are an existing buyer, you can get a 5% down payment loan,” Christiansen says.
Some of these loans have narrower qualification requirements but may be more widely available than no-down payment options.
“Lenders may offer conventional mortgage products with as little as 3% down payments designed to assist low- to moderate-income buyers through programs such as Fannie Mae's HomeReady and Freddie Mac's Home Possible,” Burke says.
You may also be eligible for programs that can help you afford a down payment in the first place. Down payment assistance programs, for example, offer down payment subsidies, which can also help first-time buyers and low-income buyers buy their first home.
Conclusion
No-down-payment mortgages can be helpful for buyers who have sufficient income and credit but don't have the savings for a down payment. However, these mortgages can also mean higher costs and increased risks, so it may be worth exploring other options, such as low-down-payment mortgages or down-payment assistance programs.