0 Down Home Loans
by Rachelle
If you’re considering 0 down home loans, you have just begun your research into obtaining a home mortgage, or you have bad credit and low savings and you’re desperate, or ironically, you’re rich and you’re looking to invest in real estate without liquidating your assets. If you have just begun your research, you’re probably wondering how reasons for seeking 0 down home loans involve such paradoxical motivations. In another post I will discuss the wealthy origins of 0 down home loans schemes, but for now I want to dispel the notion of these programs as a means to get rich and address the reality and practicality of no money down mortgages for the average home buyer.
Is it really practical or wise to seek home loans with 0 down? Let’s find out.
Use this Table of Contents to browse 0 Down Home Loans with ease:
- What Are 0 Down Home Loans?
- The Two Main Methods to Obtain Zero Down Home Loans
- Private Mortgage Insurance and High Interest Rates
- Piggyback Loans or The 80 20 Mortgage (80/20 Loans)
- How 0 Down Home Loans Have Changed
- Why Most People Shouldn’t Seek 0 Down Home Loans
What Are 0 Down Home Loans?
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0 down home loans, also known as no money down mortgages or zero down home loans, are literally that: mortgages that don’t require a down payment. But as you’ll come to understand, this isn’t necessarily something that should instill exuberance or even reasonable hope. 0 down home financing was a key player in the subprime lending crisis. At one point during the crisis, more than 50 percent of all home foreclosures involved a 0 down home mortgage.
Before I explain why this occurred and why 0 down payment home loans are associated with poor credit, let me explain how one would go about obtaining a 0 percent down home loan.
The Two Main Methods to Obtain Zero Down Home Loans
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The following are the two techniques your bank or lender will use to work your loan into a zero down home loan. As you read this, you should ask yourself why it takes such tricks to complete this loan and if your answer to that why question has any warnings built into it. If that’s too obtuse for you, just read on.
Private Mortgage Insurance and High Interest Rates
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One of the most common ways of obtaining a 0 down home loan is to simply accept a high interest rate along with PMI (Private Mortgage Insurance). This insurance could technically refer to either Lender Paid Mortgage Insurance or Borrower Paid Mortgage Insurance, but since in most cases PMI is used in reference to the latter, you can from here forward assume I’m discussing Borrower Paid Mortgage Insurance.
Zero Down Home Loans
So what is Private Mortage Insurance? In a vast majority of situations, if you pay less than 20 percent for your down payment on a mortgage, your monthly payment will be increased with private mortgage insurance. This financing insurance is supposed to help protect the lender (the bank) if you default on your loan (simply meaning, you stop paying it).
When people can’t keep up with their mortgage payments and their home is repossessed, instead of having the banks take a loss for your defaulting on their loan, the insurance companies compensate the bank for the difference between your down payment and 20%. So if you made a 10 percent down payment when you financed and then defaulted on your loan, the insurance company would cover that extra 10 percent.
(You might now better understand why AIG, a massive insurance agency, suffered so badly from the subprime lending crisis.)
So how does this all relate back to 0 down home loans? Simply put, by agreeing to pay private mortgage insurance and committing to a much higher interest rate — and a higher interest rate will mean both a higher payment and that even less of that payment will go towards paying off your principal — you can, or you once could, convince lenders to offer you a 0% down home loan. I say you could, past tense, because it is much, much more difficult to obtain 0% home loans today than before the subprime lending crisis when lenders offered almost anyone a no money down home mortgage.
Later in this article I’ll describe special cases (such as VA loans) where it is still a little more possible to obtain 0 percent home loans.
Piggyback Loans or The 80 20 Mortgage (80/20 Loans)
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The other common way to obtain a zero percent down home loan is by using a piggyback loan or piggy back loan through a second mortgage. These are also known as 80/20 loans or 80-20 loans. The concept is to avoid Private Mortgage Insurance by having a second lender cover the 20 percent necessary to avoid PMI.
Simply put, typical 0% down home loans involve financing 100 percent of the house value with a single lender (typically a bank). That’s typically one massive monthly payment with private mortgage insurance on top of it. So to avoid paying the PMI, lenders may allow you to “piggy back” one loan on to another. In other words, you pay your 20 percent down payment to avoid PMI through a second loan with a second lender.
0 Down Loans
It’s a 0 percent down loan because you’re not actually paying it yourself. You’re borrowing it from one lender and paying to another. Just think about this: can you imagine the disasters in waiting through 0 down home loans?
Although it was a risky loan, banks still did it because they often could charge a much higher interest rate on that second loan. And they figured it would remain a foolproof investment because real estate values would always increase, right? D’oh!
In some cases you may see these loans described as 80-10-10 loans or
some other numerical variation. In the case of an 80-10-10 loan, it usually means the borrower borrows 80 percent from the primary lender, pays 10 percent down and then borrows the last 10 percent from the second lender.
Honestly, if you’re having to play such lending games to avoid PMI, you should really stand back and reconsider whether you’re really ready for the responsibility of mortgages, much less 0 down home loans.
So which one is better for your situation? It really depends. I suggest you utilize a good, flexible mortgage calculator and consider your total monthly payment over the life of your 0 percent down loan.
A couple more knocks against piggyback loans include how already having two loans out there may make it more difficult for you later on should an emergency emerge requiring more financing. Piggyback loans also indicate 0 down home loans to lenders, and 0 down home loans often indicate irresponsible borrowers, making it less likely a bank will help you finance your new emergency.
In addition, piggyback loans often require a massive balloon end-of-term payment.
You should also know that you don’t have to pay PMI once you’ve paid 20 percent of your loan. So in most cases, if you pay your mortgage responsibly and don’t have to refinance even more of your home equity, you will not have to pay PMI through the life of your mortage.
How 0 Down Home Loans Have Changed
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Many people blame 0 down home loans for the housing bubble along with the housing market collapse. This is at least somewhat justifiable. With CountryWide folding into Bank of America, the 0 down payment mortgage has become little more than a myth. The term “subprime loans” has almost become synonymous with 0 down home loans (or “no money down home loans”).
Since the subprime lending crisis, VA loans — loans guaranteed by the U.S. Department of Veterans Affairs (Veterans Administration) — have become the only 0 down home loans available with regularity. VA home loans, however, are obviously pretty exclusive.
In some cases, the First Time Home Buyer Tax Credit (an $8000 tax credit for new home buyers) combined with FHA loans (Federal Housing Administration insured loans) may still create opportunities for 0 down home loans. Before you get too excited, make sure you fully comprehend FHA loan requirements.
And you should ask yourself if — in light of the recent housing market crash — such methods of providing zero down home loans for first time buyers is really such a wise idea.
Why Most People Shouldn’t Seek 0 Down Home Loans
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If you haven’t already picked up on my dry asides, I will now say it more directly: In a vast majority of cases, 0 percent down home loans are a really bad idea. I cringe when people ask me what the best way is to to obtain bad credit home loans with zero down. Why? The reasons are numerous and I wish they were more obvious to more people.
It’s just plain more challenging to qualify for a 0 down home loan.
A bank trusts borrowers who can afford to offer a down payment more than they trust borrowers who are doing everything they can to avoid this basic financial responsibility. This is even more the case than it used to be before the subprime lending crisis and economic collapse of the last couple years.
And should you even be trying for such a loan? Often people seeking these loans have bad credit. And if you have bad credit, you need to work on your finances, not put yourself in greater debt with a zero down mortgage.
Even if you think you could qualify, they’re becoming rarer every month. Banks are simply far less likely to take on the risk than they were three years ago.
If you seek a loan requiring a down payment, you will find options galore. The days of no-money-down loans have come and gone and real 0 down home loans are now very difficult to find. If you’re trying to pay down other debt with the cash you’re trying to save by not making a down payment, you might consider maneuvering for a 125 home equity a couple years into ownership instead of avoiding the down payment up front.
High Monthly Payments
Obviously, the more of your new home you finance and the less you pay up front, the higher your monthly payment will be. In addition, to obtain 0 percent home loans, people have to inflate that monthly payment even further with either a high interest piggyback loan or Private Mortgage Insurance (or both).
Higher monthly payments at the same price means you can afford less home.
When you calculate the larger principal along with either PMI or the extra interest rate of a 80 20 loan, you will find yourself paying much more per month for the same amount of home. This greatly reduces your options in your local real estate market.
This is one area where many mortgage calculators will give you a false impression. They often don’t integrate the reality of different lending fees for different circumstances.
And the biggest reason of all to avoid 0 down home loans:
The fundamental catch-22 that almost brought the U.S. economy to its knees is this: if they haven’t been careful enough with your money to afford a down payment, why do so many Americans believe they will suddenly be responsible enough with their money to pay large monthly payments with sky high interest rates?
Do yourself, your family and your bank a favor and be more cautious and wise with your money. Pay off your debt and save more money until you can afford a healthy down payment. Get your free credit report to find where repairs need to be made and start making small, safe investments with any money you have left over.
I’ve known people who had 0 down home loans who had their homes foreclosed. They were often very intelligent, well-educated and good people. But none of these positive personal traits could save them from their own irresponsibility.
Steer clear of 0 percent down loans unless you really do have a particular extenuating circumstance that isn’t just desperate rationalization.