Is It Possible to Get a Mortgage Without a Down Payment?

Zero down loans are usually only available for less valuable houses.

Making the initial down payment can be difficult for a home buyer, since a down payment of 20 percent of a $500,000 house is $100,000. Purchasing a house without a down payment allows a home buyer to buy a house without saving up for this down payment for several years. These types of mortgages are also known as zero down mortgages. After many lenders offering zero down mortgages went bankrupt, zero down mortgages are now much harder to get, but it is still possible to get them.

Equity

Zero down mortgages provide additional risk to the bank that lends the home buyer the purchase price. When the home buyer does not make an initial payment, the home buyer will begin ownership of the house with no equity. If the value of the house drops for any reason, the home buyer will now owe more than the value of the house, ensuring that the bank cannot recoup the loan value by foreclosing on the house.

Safeguards

Because the bank is taking on this extra risk, the bank establishes additional requirements when a borrower asks for a zero down mortgage. The bank may require the borrower to have a higher credit score. A bank may also charge a higher interest rate. The lender might require the borrower to take out additional insurance, known as private mortgage insurance (or PMI) in case anything happens to the borrower, according to the Federal Deposit Insurance Corporation.

Lender Insurance

Some lenders will purchase the private mortgage insurance, which is known as lender private mortgage insurance or LPMI. When a borrower purchases private mortgage insurance, this policy automatically ends once the borrower has 22 percent equity in the house, according to the Federal Reserve. Lender private mortgage insurance does not automatically stop, so the borrower must refinance the loan to stop paying for it.

Federal Guarantees

A lender may only be willing to reduce the down payment to 5 percent, not eliminate it entirely. Zero down payment mortgages often require an additional guarantee, which a federal agency may provide. The Federal Housing Administration and the Veterans Administration fully guarantee the value of some mortgages if the borrower meets certain qualifications.

Typical Features

Private lenders may also be willing to offer a zero down mortgage. When a private lender offers this type of mortgage, the buyer may not qualify for a federal guarantee, so the interest rate may be much higher than that of a federally subsidized mortgage. Interest-only loans and adjustable-rate mortgages are common features of private zero down mortgages, since these features reduce the initial monthly payments on the mortgage.

References

• Federal Housing Administration: Managing Risks from a New Zero Down Payment Product
• Federal Deposit Insurance Corporation: Looking for the Best Mortgage
• Federal Reserve: A Consumer's Guide to Mortgage Settlement Costs