You want to buy a home, but you don’t have tens of thousands of dollars in the bank to spend on a down payment. The good news is, if you look around, you may be able to find low or zero down payment loans, which means the lender is financing up to the full amount. There are several pros – including being able to get into a house quickly – and cons – including higher interest and increased risk for both you and your lender.
100 Percent Finance Definition
When you approach a lender for a home loan, traditionally you’re expected to put something toward the purchase. If you put down 20 percent of the total home purchase, you’ll avoid the requirement of paying for private mortgage insurance. With a Federal Housing Administration loan, though, you can sometimes get away with a down payment as low as 3.5 percent, depending on your credit score.
With 100 percent finance, the lender issues you a loan for the full amount of the purchase, with no down payment required on your part. There are several programs offering zero down payment loans, including Veterans Affairs loans, U.S. Department of Agriculture loans and special programs that appear for segments of the population like physicians. Some credit unions also offer zero and low down payment mortgages to their members.
Benefits of 100 Percent Finance
The biggest benefit of a no down payment loan is that you’ll be able to get into a home quickly, without having to come up with a big sum of cash. You won’t have to spend years paying rent on an apartment while you save for a home purchase. You can get in a home immediately and start putting money into something that can pay off down the line.
If you have money in savings, a no down payment loan means you can keep that money there. A new home means you’ll have extra expenses, including furniture and landscaping. You may also find you’re paying more in utilities and other costs, so having that cushion will be a relief.
For those coming from a rental situation, often the cost of a monthly mortgage payment is lower than you’d pay for rent. Lenders that offer 100 percent financing give you the opportunity to switch to homeownership to save a little money each month, which means you may be able to set some money aside. If you can pay a little extra on your mortgage each year, you’ll be able to build up some of that equity you would have gained if you’d put money down.
Higher Interest Rates for Loans
One of the biggest pitfalls of a low down payment loan is that you’ll pay more in interest over time. If you’re buying a $200,000 home with a 20 percent down payment, you’ll subtract $40,000 from the amount you’re financing. So instead of paying 5 percent interest on $200,000 over that 30 years, you’ll be paying 5 percent on $160,000.
Without the benefit of a down payment, the lender is forced to take a bigger risk with you. This can lead lenders to also charge you a higher interest rate from the start, only adding to the extra interest you’ll pay over the course of the loan. If you stay in the home only a few years, you could find this means most of the money you pay is interest and taxes, leading to very little equity in the home.
Zero Equity and Risk
That isn’t the only way a low down payment can hurt you financially. If you buy your house and the real estate market takes a nosedive, you stand to lose more because you have no equity whatsoever in your house. This is how someone ends up underwater, which is a term referring to a borrower who owes more on an asset than it’s worth.
Such a situation will force you to stay in a home even if you want to move. If the market does pick up, it will take you a while to build up equity since you’re starting from zero, which means you’ll never get that extra money you need from your investment. The equity in your current home can help you pay a decent down payment when you buy your next house.
Private Mortgage Insurance Costs
Another negative of a 100 percent finance is that you’ll be stuck paying PMI, which will be an added monthly expense. You can expect to pay between 0.5 percent and 1 percent of your loan on PMI, which is up to $1,000 a year – or $83.33 a month – for every $100,000 you borrow.
Once you’ve paid off 20 percent of your loan, you can cancel your PMI, but this isn’t as easy as it sounds. You’ll have to formally request PMI be canceled in writing and, in some cases, your lender will require that you undergo an appraisal to ensure that 20 percent of your home’s value is, indeed, paid off. If you’re moving the home from your own name to an ex’s, you can also try quit claim deed loopholes to get out of paying PMI, but chances are you’ll still have to pay it even if you’ve transferred the title.
Refinancing With Quit Claim Deed
If you’re transferring property to someone you know, such as a family member or ex-spouse, you may have the option of doing so without a down payment. A quit claim deed mortgage assumption simply moves the title from your name to the other person’s. The transferee can take over the mortgage payments until the day he decides to put the home up for sale.
Also known as a nonwarranty deed, a quit claim deed releases your claim in the property and transfers it to the other person. When you make this type of transfer, you make no guarantee about the title of the property you’re relinquishing. It’s also important to note that a quit claim deed only applies to the title of the home itself. The mortgage will still be in your name.
Quit Claim Deeds and Mortgages
The problem with these type of quit claim deed loopholes is that they don’t protect the person whose name is on the mortgage. They tend to work best when no mortgage exists on a home and you simply want to transfer ownership to the other person. If there’s still a mortgage, the lender will expect those payments to continue to be made, whether you’re living in the house or not.
A quit claim deed mortgage assumption isn’t as simple as filing a quit claim deed to your title. In most cases, if you have a mortgage, you’ll want to sell the home to the other person in the form of having her take out a loan of her own. Otherwise, if she stops making payments, the mortgage company will come to you for the money.
Mortgages After Divorce
In many instances, homeowners look for quit claim deed loopholes during a divorce. One spouse often plans to stay in the home, with the other moving out. The mortgage probably was written in both parties’ names, though, which means you’ll want to have one person’s name removed. Unfortunately, this isn’t as easy as asking the lender to remove one name.
In order to make a quit claim deed mortgage assumption happen, the person who plans to stay will need to refinance the home, effectively removing the other person. If you’re the spouse who plans to remain, it’s important to note that you’ll have to pass the same approval requirements you went through the first time around. This means your salary and credit score will need to be strong enough for the lender to take a risk on you.
- Bankrate: Mortgage down Payment: What It Is, Who It Goes to and Where It Comes From
- Quitclaim deed - Wikipedia
- LegalZoom: When to Use a Quitclaim Deed
- U.S. Mortgage Calculator with Taxes, Insurance and PMI
- U.S. Mortgage Insurers. "Low Down Payment Facts." Accessed Sept. 3, 2020.
- Consumer Financial Protection Bureau. "What Is a Second Mortgage Loan or "Junior-Lien"?" Accessed Sept. 3, 2020.
- IRS. "Publication 936 (2019), Home Mortgage Interest Deduction." Accessed Sept. 3, 2020.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.