No Down Payment Mortgages

A “no down payment mortgage” is like any other mortgage loan, i.e., some real estate property is mortgaged in favor of the lender, and the lender gives a long-term mortgage loan. Unlike the regular mortgages, however, no down payment mortgages are loans in which 100 percent of the purchase price of the real estate property, be it a residential property or commercial property, is paid by the lender. Therefore, the borrower does not have to pay any sums at the outset to purchase the property. This can be differentiated from the fact that normally, lenders expect the property purchaser to share some risk by investing some ratio of the purchase cost. But in no down payment this stipulation is done away with.

As can be seen from above, the borrower stands to gain enormously from such borrowing. If this facility were not there, the borrower would be forced to save, or borrow from friends and relatives, or take out a second mortgage or refinance on any existing real estate property to generate the amounts for down payment. This has safely been done away with. The borrower can, therefore, be free of other debts, and utilize any surplus remaining on hand to retire costlier debts. Generally, first time homebuyers opt for no down payment mortgage, as they do not have adequate savings. The term “no down payment” is actually a misnomer. There are no mortgages except the loans to some veterans that can be termed as “no down payment” mortgages. In general, a low down payment mortgage is referred and understood as no down payment mortgage. Lenders also stand to gain more customers because of low down payments, and they now have access to a larger section of the property purchasers, which otherwise was waiting on sidelines till adequate funds could be raised. Effectively, the lenders are assured higher turnover, and therefore, higher profits.

Low down payment mortgages or no down payment mortgages invariably carry a risk for the lender. If the property prices dip, as in recent times, the brunt is borne by the lender. To mitigate this risk, the lenders insist on insuring the debt. Therefore, Private Mortgage Insurance is obtained on the amount loaned. This insurance forms the security for the lender. Even PMI has undergone changes. As outstanding loan amount keeps on decreasing each month, the insurance need not be steady for the total period. Therefore, a smart PMI has come into picture, which concept allows for monthly mortgage insurance on outstanding loan amount every month. Many people who do not qualify for PMI opt for low down payment mortgages that are insured by the Federal Housing Administration (FHA)

FHA is an agency in the United States. It has a set of qualified lenders who offer low down payment loans to the borrowers, and the FHA guarantees or insures such loans. The borrower therefore pays just 3.0 to 3.5 percent of the purchase cost of the real estate property that is being purchased by him or her. Friends and relatives or charitable institutions could gift this amount to the borrower – effectively making the loan a true no down payment mortgage. State governments, and local agencies too assist the first time homebuyers by offering and encouraging such no down payment scheme. In some cases, the lenders colluded with the sellers and buyers to obtain higher amount of loan insurance from FHA, so that the borrower does not have to make any down payment, including the 3 percent stipulated by FHA.

FHA loans are very popular. Lenders come up with innovative products around this basic principle, to capture larger share of the market. As mentioned before, veterans, and other personnel continuing in armed forces, qualify for the only true no down payment mortgages. These loans are known as VA loans. The US Department of Veteran Affairs offers such VA loans. Interest rates on these loans as well as FHA loans are generally lower than on other mortgages, because in many cases, it is the first time that homebuyer avails such FHA loans.

No down payment mortgages / FHA loans are given to people whose credit score is 600 or higher. In addition, these individuals are expected to have some savings equivalent to almost around 12 months expenses. Qualified lenders insist that there should be no bankruptcy filing by the borrower for at least 4 to7 years preceding the mortgage. In addition to these, lenders have other conditions, for example in Canada the lenders insist on borrower being employed for at least 2 consecutive years, of which at least 6 months is in current employment. Like any other mortgage repayment this mortgage’s repayment is also calculated on reducing balance method. There are “zero down payment mortgages” specially designed for individuals with bad credit. The interest on these mortgages is much higher because these are financed from monies of sub prime lenders.