No down payment mortgage loans are an attractive option for first time home purchasers who have little to no money to meet deposit requirements. These types of loans can also be an attractive option to finance a holiday home or home purchase when the opportunity cost of deploying capital into another investment can yield a superior return than the financing rate of the no money down loan.
An important consideration for no down payment mortgage loans is the interest rate. If the lender offers to finance 100% of the home purchase, this may be at the expense of the interest rate. In the past, no down payment interest only loans were shunned by financial institutions because of the perceived risk. Market developments have prompted lenders to take on more risk by compensating with a higher interest rate. If you are a first time home buyer and looking at this option, you should consider the opportunity costs of paying the higher rate over the life cycle of the mortgage. If you have access to deposit money, funding the initial deposit and adopting a superior structured loan product may help you to save money over the full life of the loan.
The requirements of no down payment home loan lenders can sometimes stipulate private mortgage insurance as a condition to this type of loan. This insurance is insulation for the lender against loss of income and the failure of the borrowing party to continue mortgage payments. Under some alternative loans structures, this may not be required. There are ways to potentially avoid this that entail the lender restructuring the loan to accommodate equity provision or the borrower investigating creative ways to come up with minimum down payment requirements. Any additional cost of meeting PMI requirements for the duration of the loan needs to be factored into the financing commitment to adequately assess whether the initial attraction of the no down payment interest only loan still stands.
Government housing initiatives often provide no down payment mortgage loans or loan initiatives that require minimal deposit. The Department of Veterans Affairs supplies discharged veterans who qualify with 100% financing with no PMI requirements. The US Department of Housing and Urban Development (HUD) also supplies funds for state and local government down payment assistance programs. Freddie Mac and Fannie Mae also lend funds to cover home purchase and settlement costs. It is worthwhile to investigate the full extent of federal, state and local government loan assistance. If you meet the requirements, these no down payment mortgage programs can bring home ownership within the reach.