4 Paths to a Low or No Out-of-Pocket Down Payment

May 22nd, 2019 | Purchasing a Home, First-time Homebuyers, Government Loans, FHA Loans, VA Loans, USDA Loans

A low or no out-of-pocket down payment can involve two different arrangements: a loan that permits no down payment for eligible buyers, or a required down payment covered by approved assistance or secondary financing. They do not have the same eligibility or repayment terms.

Over a decade ago, home prices were skyrocketing month-to-month, giving homebuyers “instant equity.” Mortgage lenders offered “zero-down” home loans to most of their customers, with confidence that those borrowers would soon own a significant stake in their homes. However, the housing market crashed, and home prices began plunging instead of climbing. This left many homeowners with little equity, and in many cases, negative equity. As borrowers lost jobs and were not able to make their mortgage payments, many ended up in foreclosure. Some borrowers even chose foreclosure when they could afford to keep making payments because they did not want to be trapped with negative equity. Of course, all those foreclosures wreaked financial havoc on lenders, and they stopped offering zero-down loans.

The four paths below separate VA and USDA eligibility from assistance combined with FHA, Freddie Mac, or Fannie Mae financing. Assistance does not remove the first mortgage’s requirements or make every transaction cash-free.

1. VA and USDA Mortgages

VA (Veterans Affairs) loans are available to members of the military and their families. They are available with no down payment for those who qualify. USDA loans are made to those buying properties in rural areas and have a standard 100% Loan-to-Value (LTV ratio.) 

2. FHA Loans with Down Payment Assistance

An FHA loan can require as little as 3.5% down. Approved assistance may help cover that required contribution for an eligible buyer; this is different from saying the FHA loan itself requires 0%. Check the assistance provider’s terms and the remaining closing costs.

3. Freddie Mac Loans with an Affordable Second

An eligible Freddie Mac first mortgage may be combined with an Affordable Second from an approved source. Compare the first and second loans together: what each finances, the cash still needed at closing, and the repayment conditions. The source lists nonprofit organizations, employers, government agencies, and regional affordable-housing programs as possible providers.

4. Fannie Mae Loans with a Community Second

A Fannie Mae first mortgage may be combined with a Community Second from an approved assistance provider. Check the combined financing and whether closing costs are covered, rather than treating assistance as an unconditional gift.

Local assistance may provide another path, but each arrangement has its own eligibility, property, financing, and repayment conditions. Compare the complete transaction, including closing costs, before deciding whether the cash requirement fits your budget.