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Should you buy a home for Zero down?

By Justin Hunter

Consider yourself lucky if you have minimal finances but want to buy a home today. There are a variety of special “nontraditional” loans available for borrowers with specific needs that were never offered 10, especially 20 years ago.

Back in the 1980’s, you had to have a large 20 percent down payment on a home to obtain a mortgage. There were very few other options (all of which were not attractive). Now, there are so many different “nontraditional” loans that do not require a substantial down payment and will adjust your monthly payment. Sure, you will have to pay for private mortgage insurance (PMI) if you do not make a 20 percent down payment, but at least you will be able to finance a house.

Nontraditional loans were created to aid borrowers who were in need of financing with specific needs. This is very important to realize when shopping for a special loan, such as the zero down mortgage because, while it may be ideal for your situation, there is also a good chance that it could be detrimental to you and your credit in the long run. The reason mortgages have guidelines is of course to protect the lender but also to protect the borrower from taking on too heavy of a mortgage that will be difficult to repay.

Mary Wise explains why first time home buyers may want to explore all their possible financing options, in her article, “Zero Down Mortgage Loans for First Time Home Buyers?” that is posted on jumboloanrates.net.

The first issue to consider when dealing with a zero down mortgage is the actual down payment.

As mentioned earlier, a 10 percent to 20 percent down payment is required to obtain most traditional loans. When you take into account closing costs, a large down payment is difficult for many people to afford.

“Zero Down Mortgage Loans are meant for those who cannot put away enough money for a down payment. With these loans you can finance 100% of the property’s value. Moreover, for those who cannot even raise the money for closing costs, there are lenders offering 103% or 105% Finance Home Loans. The extra percentage is used for covering the closing costs which will then be included in the overall debt that you’ll have to repay in monthly installments.”

While this sounds great for a prospective home buyer trying to keep some cash flow by not spending all of his or her savings on the down payment on a home, the zero down mortgage loan does come equipped with some potentially serious drawbacks.

“A down payment has not only direct positive financial consequences but it also can be a positive factor when the lender has to decide whether to approve your loan or not and on what terms. When the lender has to consider your application, a down payment tells him that if you were able to save enough money to make a considerable down payment, you’ll probably be able to meet your monthly payments without any difficulty.”

So, through the zero down mortgage, you are basically saying that you do not have enough money to afford the house. You may still be approved the loan but will not receive the best terms and rates available to someone who made a descent down payment. This may not sound like a big deal but can cost several thousands of dollars in the long run, not to mention you will also be paying interest on the deferred 20 percent payment.

The zero down mortgage is best utilized when you need a home immediately for an unexpected addition to the family or some other immediate emergency that requires you to buy a home even though you do not have additional finances for a large down payment.