There is yet another zero down mortgage option available to prospective home buyers, the latest being offered by The Massachusetts Housing Finance Agency (MassHousing).
The quasi-public agency already offers 30-year fixed-rate mortgages up to 97% loan-to-value (LTV), but launched its Down Payment Assistance (DPA) program to extend financing to 100% combined loan-to-value (CLTV), meaning no down payment is necessary to purchase a home.
Like similar home loan programs, there are maximum income limits, and it’s only available to home buyers in the state of Massachusetts.
First-Time Home Buyers Can Get a Property with Zero Down
First things first, the single-family home or condo needs to be your first. Generally, this means no ownership in real property in the past three years prior to application. It also means the home should be your primary residence, one that you occupy.
But in reality, you may have owned a home several years ago and could still be eligible. Additionally, it might be possible to purchase a 1-4 unit property via this program.
On top of the occupancy requirement, there are income limits, which vary by county. The maximum area median income is $103,4000 or less in eastern Massachusetts, $85,700 in Worcester County, and $67,200 in Berkshire County.
Assuming you meet those requirements, you also have to meet minimum credit score and debt-to-income ratio (DTI) guidelines. It’s unclear what these are, but they say you need good credit.
It’s a conventional loan product that I believe is backed by Fannie Mae or Freddie Mac, so chances are the minimum allowable credit score is 620. That also means conforming loan limits likely apply.
Lastly, you need to attend a homeownership class, an activity that has been proven to lower mortgage payment default and subsequent foreclosure.
How the Down Payment Assistance Works
Unlike some other loan programs that might provide a grant for the down payment, this isn’t a gift or a forgivable silent second mortgage.
Like the first mortgage, it must be paid back, and is due in full if and when the property is sold or refinanced. But there is no prepayment penalty.
It is a second mortgage for up to 3% of the purchase price, with a maximum loan amount of $12,000, meaning you can purchase a property valued as high as $400,000.
Interestingly, it is a fully-amortizing 15-year fixed mortgage, not a 30-year loan, so homeowners will actually make a dent in it sooner and own their homes that much quicker.
That makes the loan a bit less risky, despite borrowers having no skin in the game initially.
And unlike typical second mortgages, there are no additional fees or closing costs to worry about.
You Get a Second Mortgage with a Rate of 1%!
What makes it even better is the fact that the interest rate on the second mortgage is just 1%. Yes, 1%!
To give you some perspective, the monthly mortgage payment on a $12,000 15-year fixed set at a rate of 1% is only about $72.
The extra $72 per month shouldn’t make or break many borrowers, but having to come up with $12,000 for down payment can be a serious barrier to homeownership.
The DPA is being internally subsidized via MassHousing, so the mortgage rates on the second mortgage are much cheaper than what you’d find in the open market, assuming you could even find a second mortgage at 100% CLTV.
I believe mortgage insurance is required, but like Fannie Mae’s HomeReady program, there are reduced rates for MI.
And the MI from MassHousing comes with mortgage protection insurance built-in, which covers the principal and interest portion of the mortgage for up to six months (up to $2,000 per month).
The benefit can be used for any six-month period during the first 10 years of the mortgage, at any time other than the first six months, for obvious reasons.
MassHousing offers the new zero down financing option via more than 160 banks, credit unions, and other mortgage companies, and is making it available to homeowners immediately.