Saturday, February 11, 2012

Mortgage Loans with No Down Payment

People who are interested in buying a home by availing a conforming mortgage, are required to provide at least 20 percent of the price of the home as down payment. Prior to the sub-prime crisis, mortgage lenders were willing to provide mortgage loans even to borrowers who could not come up with the requisite down payment. The reason for lax lending rules have been discussed in detail in the article titled, 'Housing Loans for People with Bad Credit'. Hence, it would suffice to say that lenders believed that home prices would eventually appreciate and lent money to people regardless of their ability to make good the amount of down payment. In the aftermath of the sub-prime crisis, mortgage loans with no down payment may still be available to people although one must bear in mind that the rules and requirements have become more stringent.

Mortgage Loans with No Down Payment

The following options are available to people who are interested in buying a home by availing no down payment mortgage loans.

Private Mortgage Insurance
Private mortgage insurance (PMI) is required for all mortgages where the loan to value ratio is 80 percent or more. In other words, people who are providing less than 20 percent down payment, are required to purchase insurance that protects the mortgage lender against default. For a regular premium paid by the homeowner, the private mortgage insurer undertakes the responsibility of reimbursing the lender, in case the borrower fails to make good the mortgage payments. Although PMI existed prior to the sub-prime crisis, the proliferation of foreclosures has almost doubled the PMI default rate since 2007. It's but natural that mortgage insurance companies have tightened the eligibility requirements for purchasing PMI.
  • The aspiring homeowner is expected to have a credit score of at least 720.
  • The debt-income ratio cannot exceed 41 percent.
  • For a long time, the premium on home mortgage insurance was between 0.5 and 1% of the loan amount but today the insurance premium has increased significantly.
FHA Insured Loans
These loans typically require the borrower to pay 3.5 percent of the purchase price of the home as down payment. However, a first time home owner has been given the option of monetizing the anticipated $8000 tax credit. The first time home buyer tax credit has been extended till April 2010. A number of housing finance agencies are offering tax credit loan programs that allow the borrower to procure a short term loan that is backed by the anticipated tax credit and secured by a second lien on property (home). This loan can then be used to make the requisite down payment. The short term loan is repaid after the home buyer receives the income tax credit from the IRS. In other words, a homeowner can easily buy a home worth $228, 571 without making any down payment. The biggest advantage of FHA insured loans is that they are available even to people with bad credit.

FHA also allows public school teachers to purchase FHA insured foreclosed homes located in low and moderate income neighborhoods for just 50 percent of the appraised value. Moreover, US Department of Housing and Urban Development (HUD) reduces the down payment requirement to just $100 if the home is purchased with an FHA insured home mortgage.

VA Insured Loans

Department of Veterans Affairs guaranteed loans are meant for veterans, active service members, reservists and members of the Public Health Service. Despite the borrower not making any down payment, the lender is prohibited from obtaining PMI, since the Department of Veterans Affairs guarantees the loan. There are limits on the origination fees and closing costs and a meager funding fee of 2 percent of the loan amount is required. The funding fee can be further reduced if the borrower chooses to make a 5 percent down payment.

Prior to the sub-prime crisis, piggyback loans and seller financing were available to people who were interested in purchasing a home without making any down payment. However, today these are no longer feasible. For more on piggyback loans and seller financing, one may refer to the article titled, 'Zero Down Mortgage: 0 Down Mortgage Loans'.

It's evident that mortgage loans with no down payment are still a viable option for people with good credit scores as well as people with less than perfect credit. Lease contract with option to buy may also be considered by people who are not interested in the aforementioned options. One should not forget that one is still obligated to make mortgage payments on a regular basis.