Zero Down Options
Zero-Down financing for Real Estate has been around for many years. There were even seminars, and may be still, about the virtues of purchasing properties, especially investment properties, with Zero down payment. Many of these involved "Creative Financing" techniques that were difficult to administer, and in some cases risky for the lender, borrower, or both.
Today Zero Down payment is limited to government FTHB (First Time Home Buyer) programs, VA Loans, or creative financing. In General, reasonable credit is required, and you will be asked to document your income. W2s, Paystubs and/or Tax returns are generally required. Government programs, such as FHA, have somewhat flexible Guidelines in terms of income and employment, but generally require extensive documentation. FHA currently requires a 3.5% down payment, which is up form the previous requirement.
Let's start with the old programs. This would include FHA and VA Loans. VA has has zero down financing for decades, and it allows many previous members of the Armed Forces, and current members as well, to obtain excellent government guaranteed loans with little or no down payment. There are still closing costs, but in many cases the seller can pay most of them, which allows the purchaser to get in with less money than would normally be required to rent a home! The drawback in some areas is that the price of houses has outpaced the maximum loan amount. The same is true with conforming conventional loans.
The First Mortgage is often similar to other programs you might have seen. (See the other categories of loan programs for more info). It may be a 30 year fix, an adjustable rate mortgage, or ARM, or a hybrid. The hybrids are fixed for the initial period (3,5,7,or 10 years) and then become adjustable after that. They often also feature an "Interest only "option. This means that the payments made for the initial period will pay only interest, and will not reduce the principal balance. So the loan does not get smaller, but of course it doesn't get bigger, either. It does allow the borrower to qualify for more, and afford a bit more house. In general, this options should only be used if you are confident that you will be able to make the payment once the interest only period is over, or if refinancing is in the cards. At the end of the fixed period, say five years, the loan becomes now a 25 year amortized loan, which will raise the payment. There are some 40- year mortgages coming on the market, which would obviously reduce the sting by extending the period. Does this make sense? If this is even a little confusing, and you are considering an interest only loan, please give us a call or shoot us an e-mail so we can answer your questions.
Through 2006 the most common structure is the 80/20. Simply put, the borrower gets two mortgages. A traditional mortgage for 80% of the purchase price, and a smaller Second mortgage for the 20% remainder. Hence the term 80/20. These programs have largely been phased out at the moment. (2008)
The second mortgage is usually higher in rate, since the risk to the lender/investor is much greater. The four most common forms are:
30/15, or "Thirty due in fifteen" This is a 30 year, fully amortized loan that has a balloon payment is fifteen years. Very few of these loans are around that long, so the fifteen years is usually not a problem. You always have the option to pay additional money to reduce the principal as you go. This is highly recommended.
15 year fixed. This is simply a loan that is 15 years, fully amortized. If you can swing the payments, this is a very good loan.
15 year interest only. This keeps the payments down by having you pay only the accrued interest on the loan. Like the 30/15 it has a balloon payment in 15 years.
HELOC, or Home Equity Line of Credit. These usually feature interest only payments, but are extremely flexible. The loan can be paid down, and then re-accessed like a credit card, so you only use what you need when you need it. If you are purchasing a move-up home this is a great way to buy if you haven't sold you old house, or aren't sure if you want to hold it as a rental, or want to remodel or put in a pool. Usually the rate is adjustable, and based upon the wall street prime. The margin over prime will depend on credit, down payment, if any, and other factors. These are generally credit sensitive, and may not be available to borrowers with less than stellar credit scores.
There are also other variations. There are One-Loan options, but they are less popular at this time that the Piggy-back loans. They often have mortgage insurance, and in many cases cost more overall that the piggies.
A word of caution: Some loan programs have high margins during the adjustable period. A high margin is generally anything over about 3.5%. If you have a lower credit score you may need to accept a 2 or 3 year fixed loan with a high margin to get in the door, and plan on refinancing when your credit looks better a few years down the road. High margins are generally not found on hybrid loans of five years or more, but check anyway. The margin is often a better indicator of the loans cost than the initial interest rate, so be sure this is explained to you. Also be sure you know if your loan has a pre-payment penalty, and if so, for how long.
Remember, pick the best loan for you, not the best loan for somebody else.
Questions or concerns? Call us at 800-200-9329, or e-mail us using the addresses on our home page!