Should I Buy a $0 Down Home?

written by Jennifer Chiongbian
MORTGAGE EXPERT
12 · 16 · 20
no payment

$0 down is such an enticing idea. Practically get a house for free with no money down and just make the house’s monthly payments. No need to shell out $60,000 cash for a $300,000 home. It sounds like a no-brainer, right?

Well…not so fast. There are some things to consider if this is the route you wish to take.

First off there are two types of loans that allow for a true $0 down payment. Only USDA and VA loans allow this. These are government-backed loans with particular requirements to qualify. 

Government-backed loans mean that the loan is insured by the federal government in case you stop making the payments.

For USDA loans that are guaranteed by the Department of Agriculture, the requirements are:

  • Has to be a primary residence
  • It has to be located in a qualified rural area
  • You must have a credit score of 650
  • Your adjusted income is equal to, or less than 115% of the median income in the area
  • Mortgage insurance required

For VA Loans that are backed by the Department of Veteran’s Affairs, you are eligible if you meet one or more of the following requirements:

  • A spouse of a service member who perished in the line of duty or as a service-related disability
  • Served 90 consecutive days in wartime active duty
  • Served 181 days of active service during peacetime
  • Six years of service in the National Guard or Reserves
  • 660 credit score

What if you do not qualify for $0 down?

If you cannot qualify for these true zero down home loans, there is an FHA loan that you may be eligible for. It is a low-down-payment as little as 3.5% up to 10% down depending on your credit score.

The FHA loan requirements are as follows:

  • 500-580 credit score
  • <43% debt to income ratio
  • Must be a primary residence
  • Must have proof of steady income and employment
  • Private mortgage insurance required

When you avail of any of these zero or low-down-payment programs, keep in mind that it is very little to no equity built into your home. You are borrowing almost the full amount, or the total amount of the property. 

You are in a financially precarious situation in the event of a downturn of the real estate market. It works in an upward trending market.

You will want to do and ask yourself a few things before deciding if this is the right loan fit for you. 

  • Assess current market conditions and projections 
  • How long do you plan to hold on to the property? 
  • What are your goals of homeownership? Ie. Build equity, short term
  • Will it be your last home you want to live in?
  • Am I okay with higher than typical mortgage payments?
  • You will be subject to private mortgage insurance (PMI)

You will be paying higher than usual mortgage payments because you are seen as high risk by the lender. Very little or no cash-out on your side for an equity contribution, coupled with low credit scores, will result in higher interest rates.

Then there is private mortgage insurance (PMI). This will be required by any lender with equity less than 20% of the home value. This will be another fee on top of your mortgage.

Once you have reached 20% equity on your home, make sure to contact your lender to have this removed. This is put in place for the lender’s protection in case you default on your payments. 

Author

Jennifer Chiongbian

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