These days, it’s tough to find “mortgages with no money down,” as banks and mortgage lenders have toughened up quite a bit over the past couple years as a result of the enormous financial crisis that ensued.
The reason they require a larger down payment nowadays is because home prices aren’t appreciating like they once were; in fact, they’re dropping steadily, shifting more risk to the lenders that issue loans.
And if homeowners don’t have any skin in the game, otherwise known as home equity, there’s a better chance they’ll walk away from their mortgages if they fall behind on payments, leading to costly foreclosures.
Conversely, if a homeowner is required to put down say 10 percent of the purchase price, the lender has a safety buffer, and the homeowner is more likely to continue making payments, as they won’t want to lose that initial investment.
Put simply, the lack of 100% financing is probably a lack of lender confidence with regard to the direction of home prices. Once things improve, we’ll probably see a lot more zero down stuff making its way to market again.
No Money Down Mortgages Used to Be the Norm
Back in 2006 and 2007, you could easily obtain 100 percent financing from nearly any bank or lender in town, with the most common the 80/20 combo loan, which is a first mortgage for 80 percent of the purchase price and a second mortgage for the remaining 20 percent.
These high-risk financing deals were rampant, and most homeowners took the bait and chose not to put any money down, assuming their home would appreciate endlessly. This explains why millions of American homeowners are now underwater on their mortgages and/or facing foreclosure.
So what options do potential homeowners have nowadays when it comes to a mortgage with no money down? Amazingly, it’s still pretty easy to get a mortgage with close to no money down.
FHA loans, which have coincidentally skyrocketed in popularity since the mortgage crisis got underway, are available with just a 3.5% down payment. And there was a time, not long ago, when you could actually get an FHA loan with no money down at all thanks to seller paid downpayment assistance, which has since been outlawed. However, individual states are still trying to use the first-time homebuyer tax credit as a down payment to circumvent the issue.
Additionally, mortgage financier Freddie Mac offers its Home Possible® 97 Mortgage, which requires as little as three percent for down payment. Sister Fannie Mae offers a similar loan program called HomePath, which calls for just three percent down as well and allows gift funds for the down payment.
Update: Both Freddie Mac and Fannie Mae no longer allow LTV ratios above 95%, meaning their 3% down loan programs are no longer offered.
Still Some 100% Financing Kicking Around
There are also zero down mortgage programs offered by the USDA (only in rural areas), VA (military and their families), NASA (astronauts), and other government agencies, and some that even exceed 100 percent financing (125% second mortgages) despite the ongoing housing bust! Of course, not everyone qualifies for these types of loans.
Meanwhile, many credit unions are offering mortgages with just five percent down, but only for conforming loan amounts. And most of the big, private banks want as a minimum down payment of 10 percent for a home loan, if not more, depending on your credentials.
Keep in mind that jumbo loan amounts require higher down payments, so don’t expect to get 100% financing or even close to it.
As a rule of the thumb, the weaker the borrower credit profile and the more complicated the loan scenario, the lower the maximum loan-to-value.
For example, if you’ve got a bad credit score or an investment property you want financed, you won’t be able to get anywhere near a no money down mortgage.
But if you’ve got great credit, a steady job, and plenty of assets, 100% financing may be well within reach. So take the time to shop around to discover all the options available to you. It’s always surprising what is out there…
Read more: Primer on mortgage down payment requirements.