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
- VA loans
- USDA loans
- 100% financing from credit unions
- FHA’s $100 down payment loan program
- HUD Good Neighbor Next Door program
- Various state housing finance agency programs
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, along with some that even exceed 100 percent financing (125% second mortgages) despite the ongoing housing bust!
You can also buy a HUD home for as little as $100 down if you use FHA financing, which is pretty much zero down when we’re talking about the purchase of a home. However, you must be an owner-occupant and the homes are located primarily in Southeastern states.
Nationwide, if you are a law enforcement officer, teacher, firefighter or emergency medical technician, you may also qualify for “The Good Neighbor Next Door” initiative, which offers HUD-owned single-family homes (one-unit) to eligible buyers at a 50% discount AND with as little as $100 down.
Also be sure to look into what’s being offered at your state housing finance agency. For example, California home buyers can take advantage of the MyHome Assistance Program, which offers 5% of the purchase price to cover the down payment and/or closing costs. Combined with a first mortgage this could give buyers the opportunity to get a home with nothing out of pocket.
Recently, TD Bank launched a 3% down mortgage as well that carries no mortgage insurance.
Of course, not everyone qualifies for these types of loans.
Meanwhile, most banks and credit unions are offering mortgages with just five percent down, but only for conforming loan amounts.
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…
Use Gift Funds to Get 100% Financing
One last note. While many 100% financing programs have come and gone, there are still quite a few programs that require five percent down or less.
In order to obtain a zero down loan, you can ask an eligible donor to provide you with a gift for the difference. So if it’s an FHA loan that requires 3.5% down, get that 3.5% in the form of a gift.
Likewise, if it’s a conventional loan that calls for five percent down, ask a relative for the five percent in the form of a gift.
In many cases a minimum contribution from the borrower’s own funds is not required, so it’s effectively zero down.
While it’s not traditional zero-down financing, the end result will be the same. In fact, your mortgage payment will be lower because the amount financed will only be somewhere between 95-96.5% of the purchase price.
However, keep in mind that 2-4 unit primary residences, second homes, and high-balance loans typically require five percent minimum contribution from the borrower’s own funds. So that trick won’t work.
Read more: Primer on mortgage down payment requirements.