Traditionally, a 20 percent down payment is required when you take a home financing loan.
Conventional lenders have established that a 20 percent down payment is enough to keep most borrowers from defaulting on a loan. They’ve found out that by imposing this down payment requirement, they’re protecting themselves from possible financing loss. A borrower who puts a significant amount of down payment is less likely to default on the mortgage.
Moreover, a 20 percent down payment prevents lenders from loaning out the full value of the property, thus reducing the loan amount.
A lower down payment makes it’s easier for borrowers to default on their loan because the money from their pocket is so minimal. But with a down payment equal to 20 percent of the purchase price, it will be a huge financial loss on the borrower’s side if they intentionally default.
Homes Without a Down Payment
A lot of people see down payment as a major stumbling block in homeownership. A large sum of money to pay upfront can be hard for many to save up for.
To avoid this, qualified homebuyers opt for home loans without a down payment. Some federal home financing options require minimal down payment. There are also mortgage options from non-bank lenders allowing buyers to purchase a home with a low down payment.
These home loans are excellent for those who can’t afford a down payment but are deserving to have a home of their own. These programs are often designed for borrowers with low- to moderate-income. Many homebuyers are qualified for this type of loan. There’s even a big chance that you, too, are eligible.
The question is, must you get the same financing?
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Should You or Should You Not Do the Same?
Low to zero down payment mortgages open doors for homeownership to those who won’t qualify for a conventional loan. But, is it the right home financing program for you?
The answer is highly personal. A zero down payment mortgage may work for others but not for you, or vice versa.
Purchasing a home without a down payment is pretty enticing. For starters, a cash-strapped homebuyer can simply get rid of the need to pay a large sum of money at closing with this loan. The funds can be used for home repair and improvements instead.
This also is an excellent option for somebody who can afford the monthly mortgage costs but can’t manage to come up with a down payment. In Addition, you may probably be able to buy a home much sooner with a zero down payment loan.
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These advantages can be very appealing. However, there also are several potential drawbacks to borrowing the entire purchase price.
The larger the down payment, the lower your monthly payments will be. Inversely, not putting out a down payment will lead to more expensive monthly costs. You’ll be strapped to this payment for the entire loan term unless you refinance in the future.
While a no down payment loan saves you money, a PMI can be another added expense.
Lenders may require you to pay a private mortgage insurance (PMI) if you borrow more than 80 percent of the property’s value. This insurance protects the lenders in case you default on the loan.
The insurance premium can add up to thousands of dollar over the years. Only the lender can benefit from the insurance. The only good thing you get from having a PMI is the ability to purchase a home without a down payment.
Another disadvantage is the high interest associated with this financing. The lesser the down payment, the higher the interest will be.
You may not need to shell out money during closing, but your interest costs can be more expensive when summed up in the long run.
To wrap it up, a zero down payment loan has its advantages and disadvantages. Having this mortgage involves certain risks. You need to weigh things out and decide if these risks are worth taking.
The best way to know about this financing is to talk to a trusted lender. If a zero down payment loan puts you and your lender in a win-win situation, this mortgage might just the right for you.