Purchasing a home is likely the biggest financial endeavor you will take on in your lifetime. It is vital that you understand the options and the consequences for owning a home upfront; otherwise, you can end up facing foreclosure or other personal financial difficulties. Understanding your options for a zero down payment is essential if you don’t have a lot of cash reserves but still want to buy a home.
One of the chief components of buying a home involves the down payment. Lenders want to see that buyers have at least 10-20% of the home price to put down at closing. Essentially, the more you put down up front, the less you owe in the long run and the more likely you are able to be approved for financing. However, some potential home buyers are interested in moving into a home right away, without saving for an ample amount of time. Many are looking to move in immediately for a variety of reasons such as paying less than for a rental or simply because they are anxious to be homeowners. Another issue that makes a higher down payment difficult is the amount of closing costs that are involved during a home purchase.
There are financing options available for individuals with excellent credit and income levels that will not require a down payment. While 0% down may seem like a great idea at the time, it may become a problem in the future. There are lenders that will supply 0% down mortgages where the buyer can finance 100% of the purchase. Some lenders will even add in the closing costs for up to 105% in financing. The total amount is then included in the monthly installment payments.
The upside of zero down payments
When you are in need of a home and have not been able to adequately save money, a 0% down payment can be very tempting. It allows you the extra cash to pay for closing costs, new furniture, and other moving needs. Fully financing a first home may seem like the ideal situation but it can lead to payments that are too high and interest rates that are more than average.
This can also be a good idea for someone who is making a reasonable income but hasn’t had a chance to save up a down payment. Maybe a recent medical school graduate for example.
The Downside of 0% Down Payments
Experts recommended avoiding a zero down loan at all costs. When you put 10% or more towards a home, financing is much easier to get. The proof that you are capable of saving money over time will indicate you will not have difficulties in keeping up with monthly payments. It may also allow the lender to deduce you can get financing from other resources and therefore give you better terms on your home loan. Add to that, a down payment will likely also afford you lower payment amounts on your mortgage loan. With 105% loans, there is a real possibility that monthly payments will become unmanageable especially if the home begins to need costly repairs and maintenance through the years.
Strive to Save
When you are interested in purchasing your first home, understand there typically is no ‘easy’ way. Start saving for a down payment as soon as you know you are looking to buy and be committed to reaching that goal before shopping for a new home or a home loan. In addition to saving, obtain a copy of your credit report and score to see where you stand in the eyes of lenders. Resist the temptation to get in to a new home for ‘free’. What may seem like a great deal can certainly cost you in the end. With the influx of foreclosures in recent years, the news has certainly added credibility to the need for a down payment savings plan and a suitable waiting period before taking on such a large financial burden.
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