No Down-payment loan options

Just a few years ago, the only low down payment loans were those insured by HUD. These included FHA, which has approximately a 3% down payment requirement and VA which is a no-down HUD insured loan for military veterans. That has changed over the last few years and conventional lenders now offer no down and low down loans. In fact, there are a couple programs that offer a less than no down loan... in other words, you can not only buy a home with no down payment, but you can even finance all the closing costs as well.

There are a few different ways to get to a no=down payment loan. There are 100% loans (all one loan); then there are the 103% and 105% programs for closing costs, and finally there are the 80% - 20% two-loan combinations to equal the 100% loan. Each option has different aspects that make it unique:

The more 'generic' 100% loan is just that simple. One loan, no down payment. The upside is the no-down. The downside, although not terrible, is the higher rates and the mortgage insurance requirements associated with the no-down program(s). You can estimate at least a 1/2% greater rate for a no-down program vs. a conventional loan with 5% or more down payment. In addition, the mortgage insurance that is required on all loans (to insure the lender against loss if there is a default) is greater (as much as 1% of the loan amount). So, for example, if the current conventional loan with 5% or more down is 6.25%; then the loan with no-down payment would be as much as 6.75%. The loan with 5% down payment would have a mortgage insurance premium of approx .8% (annually) but the no-down loan mortgage insurance premium is as high as 1%.

The aforementioned 103% and 105% programs are very similar, but the rate is also adjusted higher and so is the mortgage insurance costs. From an investment banking or Wall Street's position, the less down payment, the higher the risks... the higher the risks of default and foreclosure, the higher the rate is to offset the risk to the lender and investment community.

The other option is the 'combination' loan. This is where the no-down payment loan is achieved by obtaining one loan for the 80% of the sales price and there is a second mortgage for the other 20% equaling 100% loan. The upside is still no down payment, but the rate is as much as 2 to 3% greater on the 20% second. So, in example, the 80% portion could be at the 6.25 to 6.375%, but the second mortgage for the other 20% would be around 9%. No mortgage insurance is required in this scenario either.

In addition, there are very special 100% programs that are designed for lower to middle income families. These are just like the no-down programs described above, but the rates are less  by just a bit. The difference is that there are income limits on these programs depending upon the mid income in the given county. Check your local lenders regarding these requirements. Good luck and be careful the lender doesn't take advantage of you just because you have a lower income or no down payment.

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