Nowadays, many homebuyers face challenges in realizing their dream of owning a home due to tight finances. To budget for a home purchase, they must consider high property prices, stubborn mortgage rates, maintenance costs, and renovation expenses. The most daunting obstacle, however, is often the down payment, which seems like the final massive hurdle between ordinary families and the American Dream.
But what if buyers could remove the down payment from the equation?
Last month, United Wholesale Mortgage, one of the largest mortgage lenders in the U.S., launched a new zero down payment mortgage program, sparking interest among cost-conscious buyers about the possibility of homeownership being within reach.
Jerry Devlin from Assume Loans in Brookline, Massachusetts, notes that low and no down payment loans have been popular choices for years.
“The two most attractive programs are those from the Federal Housing Administration (FHA) and the Veterans Affairs (VA),” he says. “These programs aim to make homeownership more accessible for those who find it challenging to save a substantial down payment.”
Fortunately, these low and no down payment loans are not just for veterans or first-time homebuyers. Read on to see if 0% down payment is right for you, or if you should steer clear of this option.
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Experts say the simplest way to avoid a down payment is by qualifying for the VA or FHA low and no down payment programs.
“VA loans allow veterans to buy homes without a down payment, while FHA loans enable anyone to buy a home with as little as 3.5% down,” says Devlin. These agencies charge borrowers upfront and/or monthly private mortgage insurance (PMI) fees to ensure that investors’ loans are not defaulted on (PMI repayments range from 0.3% to 1.15% of the mortgage).
Additionally, other zero down payment mortgage programs are often aimed at first-time homebuyers or low-income borrowers. For instance, Bank of America has a mortgage program that requires no down payment or closing costs, targeting minority communities in cities like Charlotte, Dallas, Detroit, Los Angeles, and Miami.
These programs are designed to assist low-income first-time homebuyers. Loans are typically limited to buyers with certain income and asset levels and often require the completion of homeownership education courses.
Devlin explains that no down payment loans are suitable for those looking to enter the real estate market with the expectation of increased future earnings, such as through a promotion or earning new degrees or certifications.
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Similarly, Richard Redmond from Redmond Mortgage Capital in San Rafael, California, believes these programs benefit those aiming to purchase permanent homes, especially if the buyers plan to live there long-term.
“If you’re planning to settle down in one place, this is really good,” says Redmond. “Over time, you’ll build equity. While the real estate market has its ups and downs, in the long run, you’ll do well as property values generally increase.”
While the idea of a small or no down payment is appealing, these loans aren’t suitable for everyone.
For those with a history of saving difficulties, taking on a large loan might pose significant problems. For example, if buyers have tight finances at the time of purchase, they might find themselves underwater when unexpected bills arise.
Devlin points out that the cost of homeownership can be surprisingly high when insurance, taxes, and maintenance expenses increase faster than inflation.
“Homeownership can come with many unexpected expenses,” Devlin says. “If someone can’t save up a decent down payment, they might also struggle with unexpected repair costs.”
Zero down payment loans offer buyers a shortcut into the real estate market, but the potential hidden costs should not be overlooked. Buyers should carefully consider their financial situation and future expectations before opting for this scheme. Ultimately, prudent financial planning and a comprehensive assessment of risks will be key to successful homeownership.
