The zero down mortgage offer is an enticing, yet at times controversial offering from mortgage lenders. Understanding the allure is fairly straight forward, who would not want to obtain a home for their signature? The controversy, is a bit more nuanced.
How can lenders offer a zero down loan?
Lending an individual hundreds of thousands can be a risky endeavor for lending institutions. Borrowers have to meet certain credit and income requirements to show that they have the capacity to pay the bills. For most standard mortgage loans, a downpayment of 20% is preferred, however, this can be a huge barrier for first time home buyers trying to flip from rent life to mortgage life.
Luckily, several products are offered to borrowers to reduce, or eliminate the down payment all together. Often times they come in the form of government backed loan products with additional qualifiers such as location and income, or veterans status. The most common zero down offers are USDA and VA home loans.
What is a USDA loan?
The USDA loan started in 1949 as a way to help low and middle income families obtain a home in rural America. That goal remains the same today and for those who qualify, is a fantastic opportunity to get into a home with no money down.
The “catch” on the USDA loan is that it is income and geo specific. If you live in a large city, chances are you can not qualify as it is focused on rural and occasionally suburban areas. To be sure, check the official USDA eligibility map, or a lender experienced in the USDA loan product.
Income requirements are the other large part of qualifying for the USDA loan. Individuals need to make enough to pay the loan, but not too much in which they exceed the programs spirit of helping low and middle income Americans. USDA income limits are geo specific and updated to reflect the current income averages in a given area. I recommend using the income limit tool offered on USDALoans.com as a guide.
Additional requirements such as property conditions will need to be met. In a brief synopsis, the house needs to be in good shape structurally with no repairs needed. That includes peeling exterior paint. If looking to buy a fixer upper, the USDA Loan is not for you!
Zero down VA loan?
The VA home loan is perhaps one of the greatest benefits to US veterans as it offers zero down, competitive interest rates, and no private mortgage insurance or guarantee fee which can increase the monthly payment for loans that do not have 20% down.
The requirements to utilize the VA loan start at being an eligible veteran, service member, or surviving spouse. If in doubt of your status, you can request a COE online and take that information to your lender.
VA loans can be fairly complex from a lenders perspective but several institutions specialize in the product. In general, if a lender or real estate agent tells you to forgo the product, get a second opinion. Historically folks were steered away from the VA loan due to the extra workload on the agent and loan officer but specialized VA lenders have worked hard to change this.
Like the USDA loan, the property will need to meet specific requirements so that it is not estimated to need any immediate repairs.
Alternative options
While the USDA and VA loan are the most common paths to zero down home ownership, it is important to talk to a trusted licensed mortgage professional as alternative programs may exist. These can range from state based to individual lender based programs.
Additionally, programs such as the FHA loan offer lower down payment options for those who may have save some, but not all of the typical 20%. The FHA loan for instance starts at a 3.5% down payment.
The zero down controversy
While zero down loans offer a great path to ownership, they are not without their detractors. Some on the more fiscally conservative spectrum will argue that one should save for a downpayment before purchasing a home. The idea that if you don’t have 20% to put down, you don’t have enough savings to pay for unexpected repairs.
Proponents of the zero down option will argue that without it, many folks will be relegated to renting their entire life and miss out on the opportunity to build equity in their home. Home equity is a historically proven way to attain wealth in America as home values will increase over an extended period of time.
