What Type Of Zero Down Mortgage Is Best For You?
Matthew Allen
80/20:
The 80/20 loan is simply an 80% first mortgage with a 20% second mortgage for a total of 100% financing. In other words you are getting two loans. This is the most common no down mortgage.
The positive aspect of this loan for a subpime borrower is that the interest is typically much lower than a 100% one loan.
This zero down mortgage is a beneficial loan for conforming borrowers because it will help you avoid mortgage insurance. Mortgage insurance is an insurance policy that you pay and that is of no benefit to you. It simply protects the lender in case of default/foreclosure. Sub-prime loans almost never have mortgage insurance, but be sure to ask.
The negative side of this loan is that you will pay two different sets of closing costs, which could tack on an extra couple of thousand dollars.
Also many people are afraid of having to make two different payments. Have no fear. You are more or less paying the same amount as if it was one loan and typically they are due at the same time.
One final thing to think about is that the second mortgage interest rate will almost always be significantly higher than the first mortgages interest rate.
The seller can typically pay 3% of the purchase price of the home towards closing costs with a conforming loan. With a sub-prime loan the seller can typically pay 6% of the purchase price towards closing costs.
100% One Loan:
This type of zero down mortgage is pretty straight forward. It is simply one loan for 100% financing of the purchase price.
Unfortunately sub-prime borrowers will typically pay a much higher interest rate than they would with the 80/20 home loan.
For conforming borrowers the down side is that you will pay mortgage insurance which can range from .55% to 1.94% of the loan amount. The benefit for conforming borrowers is that the interest rate will be lower over all since you will not have a second mortgage. Plus once you have 20% equity in the home you can get the mortgage insurance taken off.
The seller can typically pay 3% of the purchase price of the home towards closing costs with a conforming loan. With a sub-prime loan the seller can typically pay 6% of the purchase price towards closing costs.
2/28 or 3/27:
This loan is a very common zero down mortgage for sub-prime borrowers but conforming borrowers can take advantage of this loan as well. This loan is an Adjustable Rate Mortgage also known as an ARM. What this means is that the loan’s interest rate is fixed for the first 2 to 3 years of the loan, and then is fully adjustable for the remaining years of the loan.
These loans have caps, meaning they can only fluctuate a fixed percentage per adjustment and have a max in the percentage that they can rise for the life of the loan.
A quick example of this would be as follows. Lets say you have a 2/28 loan and the interest rate is 7% with caps of 3% and 6%. So with the first cap being 3% it can only rise a maximum amount of 3% per adjustment. The second cap of 6% is that the interest rate can only rise by a maximum of 6% for the entire life of the loan. So the worse case scenario is that your interest rate would rise from 7% to 13%. But remember it can also fall as well.
I refer to these types of zero down mortgage as band-aid loans. It gets you into a house and at the end of the 2 or 3 year period you can refinance. Hopefully at this time you are now a conforming borrower and you will qualify for a fixed home loan at a lower interest rate.
The seller can typically pay 3% of the purchase price of the home towards closing costs with a conforming loan. With a sub-prime loan the seller can typically pay 6% of the purchase price towards closing costs.
VA Loan:
The VA is 100% financing and has no mortgage insurance. Unfortunately you will need to be a veteran to qualify for this zero down mortgage.
The good thing is that this type of zero down mortgage is underwritten on a case by case basis. So even if you don’t have great credit or have other issues such as not having any credit at all, you still have a good chance of getting one of these loans.
Seller can pay all closing costs.
USDA Rural Housing:
These 100% loans were once known as farm home loans. They offer zero down mortgage financing and are also underwritten on a case by case basis.
To qualify for one of these zero down mortgage you normally need good credit, but not always. All collections and charge off’s will need to be paid. The property can not be located anywhere the USDA (United States Department of Agriculture) deems urban.
There are also income limitations with this program as well as certain criteria that the home must pass.
Seller can pay all closing costs.
Emerging Markets:
This is another awesome zero down mortgage. This program is especially useful for home buyer’s who have limited or no credit at all. Through this program they allow you to build alternative credit through other bills such as an electric bill, phone bill, rent etc.
There are some income limitations to this loan depending on where the home is located. The income limitations are higher than those with the Rural Development Program.
Seller can pay up to 6% of sales price towards closing costs.
State or Local Financing:
Some states also offer a zero down mortgage. These loans come and go depending on funding. They are definitely worth looking into.
For example Oregon has the Oregon Bond Loan.
The requirements for these types of loans will vary but they will be more strict than some of the other types of 100% financing that are available.
You might need to do some footwork for this type of zero down mortgage. You may be surprised to find that your loan officer has never heard about these programs. Because these loans are government sponsored you will need to call, write, or go down to your local government offices. Below are some other government agencies you can contact for special programs.
HUD/FHA
451 7th St.
Washington, DC 20410
www.hud.gov
Fannie Mae
3900 Wisconsin Ave. NW
Washington, DC 202-752-7000
www.FannieMae.com
Freddie Mac
8200 Jones Beach Drive
McLean, Virginia 22101
www.FreddieMac.com
When you contact your local government agencies about the zero down mortgage. You should also ask about special purchase programs they may be offering as well. Many times government agencies will work with several of the local contractors to build affordable housing.
Basically the government gets a special rate from the contractors and then will subsidize the remaining amount to offer the homes at a much lower cost. For example a home may be worth $125,000 but the government will sell it for only $85,000 to those that qualify.
You can also contact you local building associations to find out about other special programs that they may be involved with. Just look in your phone book for state or local builder associations.
FHA Loan:
The FHA loan is not actually a 100% financing loan. They do require at least a 3% down payment. You can use down payment assistance programs to cover the 3% plus your closing costs.
Most people are under the assumption that the government is the one loaning the money. In reality they are insuring the loan in case of a loss. So if you no longer made the payments and the house was foreclosed upon the government pays the lender off and takes the home.
This program allows lenders to loan money to people that would not normally qualify for a home loan. There are housing price limits as well as strict guidelines with this type of loan
About the Author
Matthew Allen is a mortgage consultant with Action Brokerage Services, Inc. in Medford, Oregon. He is also the author of "How To Buy A Home With Zero Down, Even With Damaged Or No Credit". You can visit his website at http://www.realmortgageadvice.com
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