How to Minimize or Avoid Paying a Down-Payment

Today’s homebuyers, particularly first-time buyers, are looking for mortgage programs that provide convenience and flexibility.  One of the most commonly sought programs is the 100% financing, zero-down loan.  Lenders offer these loan programs, but it is truly buyer beware in most cases, because the lender may require PMI (private mortgage insurance) or other security measure and fees.

If your income and credit will be accepted by a rental agency for an apartment, then you can get approved to buy a home with no down payment.  The reason that many people choose to rent instead of buy is that they believe they will need to have enough savings to cover 20% of the home’s purchase price in a down payment.  Fortunately, lenders realize that most people (particularly those who do not already own a home) will be unable to come up with a 20% down payment and have designed programs precisely for that situation. Consequently, renters are advised to speak with a mortgage company to learn about available mortgage programs before signing a rental lease.

Be aware that a zero-down mortgage will probably not get you the most competitive interest rate.  You will be paying a premium for the ability to borrow funds without providing security in the form of a down payment.  The interest rate may be reduced with a down payment of as little as three to five percent, but you will always pay a higher rate for the privilege of not having a down payment.  You will need to have excellent credit in order to qualify for a no-money-down loan with a competitive interest rate.

Many people do not realize that getting a no-money-down loan means that you will not be required to pay any closing costs. In this case, the lender is actually providing the borrower with more than 100% financing. 

One of the ways that lenders help borrowers with little or no down payment is to provide them with what is commonly known as a piggyback loan. In this type of program, the borrower receives a mortgage loan equal to 80% of the home’s purchase price and a second mortgage loan that is equal to 23% of the purchase price.

If lenders can’t or won’t assist a borrower, a government guarantee program might allow the borrower to qualify for a zero-down loan or a down-payment assistance program.  These loan programs are often very competitive and are usually open to low-income families and current or former members of the military.

A loan program that doesn’t require any money down has fairly high interest rates.  However, today’s interest rates are low and dropping steadily.  Therefore, buying a home with a no-money-down mortgage loan has never made more sense.

When you are in the market for a no-down-payment or zero-money-down home loan, carefully research lenders and their loan programs. Each lender is different and some specialize in the area of no-money-down loans.

First-Time Buyer Programs
If any of the following situations apply to you, then you might be eligible for a special first-time-buyer mortgage program that will provide you with a no-down-payment option or down payment assistance:

• You have never bought a home, or have not bought a home in the past three years.
• You do not have adequate documented funds to be used as a down payment.
• You have previously filed for bankruptcy.
• You are self-employed, or cannot provide adequate verification of your income.
• You have previously been turned down for a mortgage loan by a mortgage company or other lender.
• You have slow credit, damaged credit or no credit.

Further Considerations
The following text lists the things that you will need to research before pursuing a zero-down mortgage.  This information is important for every borrower, regardless of the type of loan, but it is much more important when you are trying to get a no-money-down loan.

• Your Credit Report: You need to know in advance what is on your credit report.  Having minor blemishes credit report usually is not a problem for most borrowers, but a large number of significant credit problems can reduce the amount that you will be able to borrow.  Your debt should be as low as possible prior to applying for a mortgage loan, because one of the factors used by lenders to determine your creditworthiness is your debt-to-income ratio.  Also check whether the majority of your debt is spread out over different accounts, because a lender will view several accounts more positively than a single account.
• Your Available Cash: Even when you are trying to get a no-money-down loan, you should try to increase your liquid cash as much as possible before you apply for a mortgage loan.  One way to do this is to liquidate some assets, such as stock holdings and bonds.  Lenders will often overlook blemishes on your credit report if you can cover at least two months of debt payments with your reserve cash.
• Find the Best Lender: In order to find the best mortgage program for your particular situation, you need to research the individual lenders offering no-money-down loan programs. Because lenders define zero-down mortgage programs in different ways, it is important to find the lender who offers the right type of program for your specific situation.
• Investigate Other Types of Loans:  Perhaps other types of loan programs will meet your needs, giving you the opportunity to become a homeowner even when your cash reserves are inadequate for a standard 20% down payment.  It is not uncommon for lenders to allow you to borrow two separate loans – one for the down payment and closing costs, and another for about 80% of the purchase price of the home.

Conclusion
Overall, a no-money-down loan program provides a great opportunity for first-time buyers and buyers with limited cash reserves.  There are even programs for borrowers with shaky credit histories and those who are self-employed.  No matter what your particular situation is, there is a lender who can help to make your dream of home ownership a reality.  Just remember that if you can afford a monthly rent payment, you can afford to purchase a home.  By considering important factors in advance and researching lenders and their loan programs, you will find a program that will work for you.

Even if you do not have adequate reserves to cover 20% of the purchase price, if your credit and savings history are in good condition and your income is documented correctly, most lenders will be more than happy to work with you to find a program to help you purchase your next home.