Homeownership is part of the American dream. Many of us strive for that day when we can own our own home, a place to build memories with our families over the years. We want a house we can make into a home. However, with the rise in housing costs, homeownership can seem like a reality that is years away.
The conventional thought around purchasing a home is that you must save enough to be able to pay a 20 percent down payment toward a home in order to qualify for a mortgage. This can make homeownership unachievable for many people. Fortunately, there are options available for first-time homebuyers that can help reduce or even waive the down payment requirement altogether, making the possibility of owning your own home achievable sooner than you may think.
To put zero down as a first-time homebuyer, you need to find a lender that offers zero-down home loans. Not every mortgage lender offers the same terms, so shopping around for the best lender for your financial situation is key to success. The mortgage lenders at Solarity Credit Union, for instance, offer zero-down first-time homebuyer home loans for those who qualify, as well as other mortgage programs that can help you achieve your goal of homeownership without waiting years to save up enough of a down payment to qualify for a mortgage.
Before you opt for a zero-down first-time buyer loan, you should do a little research so you understand what you’re signing up for. In this article, we’ll go over the basics so you can determine if this is the right option for you.
First-time homebuyer loans from the Federal Housing Administration are backed by the US government. FHA loans are available for borrowers who have lower incomes, making them a higher risk for defaulting on the home loan and having their home foreclosed on by the bank. Since FHA loans are backed by the government, this takes some of the financial risk off private lenders, who may offer FHA loans to their customers if the customer is unable to pay their loan back in full.
FHA loans have terms with lower down-payment requirements to help make homeownership more affordable. Most FHA loans require at least a 3.5 percent down payment; however, there are lenders who offer zero-down first-time homebuyer loans.
Traditionally, a 20 percent down payment was required to be able to qualify for a home loan, but that has changed over the years. Many lenders now offer options that require less.
If you are financially able to put 20 percent down on your home purchase, that can be to your financial advantage, as you will most likely not have any associated fees with having less money down on your home. Often, with lower down payments, you are considered a higher financial risk, so the lenders require you to also pay for private mortgage insurance (PMI) premiums every month as part of your monthly mortgage payment, which can raise the cost of your monthly mortgage payments quite a bit.
If you are unable to save 20 percent of your total house cost, you can still qualify for an affordable mortgage. The terms might not be as ideal as if you had 20 percent, but being able to afford a home when you otherwise couldn’t is an advantage in itself.
First-time homebuyer loans are one home loan type available to consumers with zero-down options, but there are other mortgage types as well. The US Department of Agriculture (USDA) loan is another government-backed loan option available to low-income consumers in certain rural areas who are looking to buy a home and qualify.
Another loan type that offers zero-down home loans is the US Department of Veteran Affairs (VA) loan, which is also government-backed. They are specifically available to military veterans and their spouses.
There are private loan options available as well that offer ways around having no down payment saved, such as a zero-down loan for well-qualified borrowers. An 80/20 loan is another possibility. In this case, you borrow 80 percent of the cost of the home from one lender and 20 percent from a different lender, thus funding 100 percent of the home cost.
The primary benefit of being able to own a home with no money down is that you can purchase your home without the long wait while you save up enough cash to put money down on your future home. Another pro is having your saved cash available for any needed house repairs or updates. Most homes require some work after moving in, and then there is also the need to purchase furniture and basic home care tools, such as a lawn mower or a security system.
There is a downside to putting no money down on a home loan. Zero down payment leaves you with zero equity on your home, which can leave you “upside down” on your mortgage. Being upside down, or underwater, on your loan means you owe more than the value of your home.
This can happen if the housing market fluctuates and causes your home’s value to drop lower than what you paid for it with your home loan. If you become unable to pay your monthly mortgage payments, selling the home would still leave you owing on your mortgage if the value of your home decreases enough to where it won’t cover the entire cost of your loan.
Putting no money down on a home loan also means you will be paying a higher interest rate on your loan, which means at the end of the loan period, you will have much more for your home due to the higher amount of interest being charged each month. You will also most likely need to pay for mortgage insurance, which will increase the overall cost of your loan.
If you would like to see how much home you can afford, try this home affordability calculator to see if it’s time to start shopping for a home. When you are ready to get pre-approved for a home loan, contact Solarity Credit Union, based in Washington State, for your zero-down first-time homebuyer loan options.