Pros and Cons of a Zero-Down Mortgage

Pros and Cons of a Zero-Down Mortgage

zero down payment mortgage document

Buying a home with no down payment: Too good to be true?

If you’ve ever looked into buying a home, it’s possible that one of the things preventing you from making the leap is the down payment. Which means you might be wondering: Is there a way to get a zero-down mortgage?

The short answer is, “Maybe.” The longer answer is, “It’s complicated.” And the longest answer is, “It might be possible, but it’s likely not your best choice.”

If you want to know more about the pros and cons of buying a home with no down payment keep reading.

0% down mortgage options

It’s important to note that if you’re looking for a no-money down mortgage option, the possibilities are limited. The most common loans are:

U.S. Department of Veterans Affairs (VA): To qualify for this loan, you have to be a veteran. You also need to have good credit, a steady income and Certificate of Eligibility from the VA. However, even if you meet all these criteria, you may still owe a down payment if the sale price of the house is higher than its appraised value.

United States Department of Agriculture (USDA): This loan is designed to help low-and middle-income people become homeowners. However, it comes with many qualifications, including size of the home (smaller than 1,800 feet) and location (rural).

80/20 or Piggyback loans: In some instances, you might be able to get two loans, one for 80% of the costs and the other for 20% of the costs, with the 20% loan coming in at a higher interest rate.

You may also be able to work with a private lender or family member to get the loan you need. However, it’s recommended that you have a written agreement of your payment arrangement.

Now that you’re familiar with the most common ways to get a zero-down mortgage, let’s talk about the pros and the cons.

The pros

The pros to zero-down mortgage are limited. In short, they are useful if:

  • You have steady employment and a good credit score but are unable to save up enough money for a down payment.
  • Moving into your own home gets you out of an undesirable living situation.

The cons

While buying a home with no down payment will make you a homeowner, there are a number of potential financial drawbacks you will want to consider:

person surprised by interest rates on zero down mortgageYou will likely have a higher interest rate

Not having any kind of savings may indicate to potential lenders that you’re at a higher risk of foreclosure. So, while they may give you a loan, it will likely be at a higher interest rate. This can substantially increase the amount you pay over time.

For example, an $80,000 loan with a 4% interest rate will end up costing $137,496 over 30 years, while a 5% interest rate will cost $154,605

You will pay more interest even with a lower rate

The larger your loan, the more you’ll pay in interest. With a down payment of just 3.5%, the cost of your $80,000 loan at 4% interest drops to $132.683.

You will probably have to carry PMI

When your loan amounts to more than 80% of the cost of your home, you have to take out Private Mortgage Insurance (PMI) to protect the organization giving you the loan. This also raises the cost of your monthly loan payments.

You’re more likely to end up under water

When you owe more on your home, you’re at a higher risk of being “underwater”—that is, owing more money than your home is worth. With the economy in flux, the chance of getting underwater increases.

Consider another option

Although a zero-down mortgage can turn you into a homeowner, it will almost certainly cost you thousands of dollars more in the long run. Instead, consider getting a loan through Greater Alliance’s Home Ready Program. Programs like this can:

  • Let you purchase a home with as little as a 3% down payment
  • Put you in contact with potential down payment assistance programs
  • Reduce your mortgage insurance requirement
  • Allow you to qualify for a lower interest rate

Talk mortgage options

If a zero-down mortgage isn’t for you, we’re here to talk about low-cost or first-time home buyer programs. Get in touch today to schedule a phone or Zoom® appointment with our bilingual staff—we’ll help you become a homeowner.