Sometimes referred to as a zero down home loan, the no-down home loan provides a means of financing the purchase of a home when there is not cash on hand to provide a down payment. While more difficult to obtain than a traditional mortgage loan arrangement, the no-down home loan is an option that often works well in a housing market that is very expensive.
The main benefit of a no-down home loan is the ability to qualify for mortgages without the need to make down payments. Many traditional mortgages require that the prospective owner put down a cash amount that is a fixed percentage of the purchase price. Depending on the location, this percentage can be anywhere between five and twenty percent. This would mean that someone attempting to purchase a home in the United States that has a purchase price of $500,000.00 US Dollars (USD) would need to supply a down payment of up to $100,000.00 USD in order to qualify for the loan.
With a no-down home loan, this obstacle is effectively removed from the picture. The financing may occur in two specific ways. First, the entire purchase price of the home, including closing costs and related fees, is financed in full. The new owner experiences no out of pocket expense as part of the purchase. The second model is known as the 80/20 approach and involves the lender financing 80% of the purchase price under a standard mortgage and financing the remaining 20% by establishing a home equity line of credit for the new homeowner.
While a no-down home loan can help secure a home with no money down, there are some drawbacks that must be considered. First, the monthly installment payments will be larger than with standardized mortgages. Unless monthly income is stable and consistent, this could lead to financial problems during the life of the financing.
Second, the interest rates applied to a no-down home loan are usually higher than with other financing options. To a degree, this is due to the increased risk that the lender is assuming by not demanding a down payment on the front end. However, the higher interest rate proportionately increases the final purchase price of the house.
One final consideration with a no-down home loan is that it may be necessary to take out private mortgage insurance, which can cost up to 20% of the final purchase price or at least the current value of the property. This can add to the monthly payment along with the higher interest rate.
When buying a home, it is a good idea to consider all mortgage options, including a no-down home loan. However, it is important to carefully consider both the benefits and the advantages of going with this loan option. While a no-down home loan works very well for some people, it can be a financial hardship for others.
