After the housing collapse and subsequent recession, lenders have started changing the ways that they qualify potential home buyers. Where a zero-down loan was more than feasible in the early 2000s, those programs are more difficult than ever to obtain.
Should you find an existing program, however, the question still remains: is it a good idea to purchase a home with no down payment?
Even with creative financing options that allow you to essentially purchase a home without making a down payment, there are some risks that you’ll need to be aware of before signing on the dotted line.
Why Zero-Down Home Loans Are Appealing
The Millennial generation is beginning to come of age, and those at the tail end of Generation Y who didn’t purchase during the housing boom are tiring of the endless cycle of paying rent on someone else’s investment.
Traditional home loans require anywhere from five to twenty percent of the total purchase price as a down payment, a sum that can be prohibitive in areas where home prices are high. Before the lending crisis, it wasn’t uncommon to find lenders who were willing to extend an eighty percent loan, on top of a twenty percent loan to cover a down payment. Effectively buyers were taking out loans for the entirety of their home, thus making no down payment. For cash-strapped buyers, this was often seen as the only option.
The Difficulty of Securing a No-Money-Down Loan
There are still programs that will allow buyers to purchase a home without making a down payment, like VA loans and some FHA loans. These programs are increasingly difficult to find, and may allow you to make a small or even a non-existent down payment however many buyers today find that they don’t qualify for these programs.
The vast majority of traditional lenders will no longer assume such a high level of risk, meaning that it’s difficult or even impossible for many buyers to qualify for these loans from traditional lenders.
Reasons to Think Twice About Zero-Down Home Loans
Assuming you’re able to find an existing zero-down home loan, it’s wise to consider whether or not making such a purchase is actually a wise financial move. At first blush, putting no money down and moving into a home you own seems like a great idea. In reality, these loans can cause trouble for homeowners and lenders alike.
When your down payment is non-existent, your interest costs will be significantly higher. Instead of paying interest on eighty percent of a home loan, you’ll be paying on the full purchase price of your property. Over the life of the loan, this can mean thousands of dollars spent just to maintain interest payments. Paying the loan off will take longer, and your monthly payments will be higher than they would have been if you were able to make a significant down payment.
You’ll also need to factor in the cost of private mortgage insurance if you have less than twenty percent of the purchase price in equity, which adds even more to the cost of your mortgage over time. In order to stay above water, your income will need to increase along with the value of your home.
Should either take a nosedive, you could find yourself in a very tight spot. These loans and financing options that allowed for zero-down property purchases are one of the reasons why so many homeowners found themselves facing foreclosure during the financial crisis, and shouldn’t be undertaken without a thorough understanding of not only the benefits of a zero down payment, but also the inherent risks. It’s best to carefully discuss the available options with a financial advisor, and not just the lender willing to extend a zero-down loan in exchange for hefty interest rates in a market that is, while rebounding, still relatively unstable.
The article first appeared at Savings.whitefence.com