No Money Down
Because it is difficult to save for a large down payment in order to purchase a home, a no-money down loan might sound very attractive to a future home buyer. But this type of loan not only is hard to find but could end up with a disappointing result.
Having no money for a down payment the buyer must then be creative in their approach.
The buyer would borrow 80% plus 20% of a home’s purchase price. This is known as a “piggyback” loan and was quite common before the financial crisis hit.
An 80% loan is used by most homebuyers when they make a down payment. The other 20% comes from a second mortgage that the buyer applies for at the same time as the application for the first mortgage
Second Mortgages info
Since lenders presently are wary of taking a risk nowadays knowing full well that losses are a real threat to their companies, it is very difficult to purchase a home with no money down.
If the loan is not paid off the lender will pay the consequence by having to foreclose the home incurring not only the cost of the foreclosure but the cost of selling the home. Also, the property could possibly be sold at a loss.
Having pointed out the difficulties stated above, there are still a few programs such as VA loans which exist, also FHA loans and some conventional lenders may allow the purchase with a relatively small down payment.
As stated previously, the no money down payment has proven to have less then better results.
They result in much higher interest costs because of the price the buyer will pay over the whole life of the loan. Interest is being paid on 100% of the purchase price, and, generally speaking second mortgages have a higher interest rate than a first mortgage. Refinancing is possible, or even paying off the second mortgage early, however, this is easier said than done.
To see how interest costs change when you borrow more, run some numbers with our loan calculator.
Buying a home with no money down means higher monthly payments; is a higher monthly payment in your best interests? No doubt you will get the transaction done quickly but you may have to deal with the consequences at some point in the future.
Additionally, it is possible that the buyer may have to purchase PMI (Private Mortgage Insurance); A requirement when there is less than 20% equity in the home, that will add thousands or more to the lifetime cost of the loan and will increase the monthly payment.
Basically, there is risk when you purchase with no money down. The facts are: your income at least must stay the same or increase, additionally your home needs to increase in value at a rate higher than the outflow of your cash.
Just evaluate all the alternatives before making a decision to go with a no down payment choice. However, If a decision is made to go with the no down payment loan be sure to have a realistic and sensible long term plan that will allow the monthly payments to be made both in good economic times and in difficult economic times.