If you’re in the market for a home but lack the cash for a down payment, a no-down-payment mortgage could be your perfect solution.
Two government-backed loans that may assist you in this endeavor: VA and USDA loans. Both have specific eligibility criteria, so be sure to review them carefully before applying.
1. No or little equity
While it can be exciting to buy a home without spending any money up front, making no down payment also comes with significant risks. The primary downside is that you may end up with little or no equity in your new residence, making it harder to sell if circumstances change or qualify for mortgage financing if you’re underwater on your loan.
Building home equity is achieved by paying down your mortgage and enjoying the appreciation of your property over time. The most efficient way to do this is with a fixed-rate mortgage, which allows you to pay off the loan with interest that remains fixed each month rather than having an adjustable-rate mortgage that fluctuates according to market fluctuations.
2. High interest rates
No-down-payment mortgages may seem attractive, but you should keep in mind that these loans carry higher interest rates than conventional mortgages. Furthermore, some of them include additional fees like origination and title-related charges as well as mortgage insurance. If you’re thinking about taking out a no-down payment mortgage, comparison shopping will help you find the best deal available.
Homebuyers looking to put down less than 20% of the purchase price can choose from several options, such as FHA loans or USDA rural development housing loans. While these require a lower credit score and are government-backed, they come with their own set of requirements and rules. You will need to pay mortgage insurance plus there may be an one-time VA funding fee. Alternatively, some credit unions offer no down payment mortgages but require members of that organization; however, these promotions may change without notice so be sure to double check with your credit union before applying.
3. Competition in the housing market
When the housing market is hot, it can be challenging for potential homebuyers to gain entry. This is especially true for those without a lot of money to put down. Due to this, competition for homes has become fierce and prices have reached record highs in most markets across America. This has prompted many buyers to turn towards low down payment mortgages as a means of financing their purchase. Bank of America is dedicated to helping low-to-moderate income homebuyers achieve their dream homes through our 26 year relationship with Neighborhood Assistance Corporation of America (NACA), the largest nonprofit organization dedicated to homebuying. Furthermore, we’re joining forces with Redfin on their newest and largest online home search tool which features several innovative features.
4. Extra fees
No-down-payment mortgages come with additional fees that could add up to a considerable sum over the life of your loan. These may include lender, origination and title-related charges that, depending on your loan amount, could run up against thousands of dollars in extra expenses. To save money for a down payment, try setting up savings accounts, using savings apps or earning additional income through side jobs.
Other options include government-backed loans such as VA and USDA loans. These low-down-payment loans are partially insured by the government and often come with restrictions on income levels or neighborhoods; additionally, they often require you to live in your home for a certain number of years or repay the funds. You could also opt for private loans from lenders or credit unions like North American Savings Bank or Navy Federal Credit Union which offer higher loan limits than standard conventional mortgage programs and do not require private mortgage insurance which may be expensive.