Reader question: “We are hoping to buy a home in 2012, but we don’t have a lot of money saved up for a down payment. We have heard that there are some programs for first-time buyers where you can get a mortgage loan with nothing down. Is this true? If so, who is offering this type of financing? Where can we get a no-down-payment mortgage in 2012?”
You might not like what I’m about to tell you, but you need to hear it all the same. In 2012, there will probably only be two ways to get a no-down-payment mortgage loan. These are the VA and USDA loan programs. Both of those programs give borrowers the option of putting nothing down on the loan. But they are limited to a select audience.
- The VA home loan is reserved for U.S. military veterans and their families. You either fall into this category or you don’t. There are no gray areas.
- The USDA program (also referred to as RDA home loans) is reserved for people in certain rural / agricultural areas of the United States. It’s also intended for low-income families. If you have an average income level for your area, or higher, you probably won’t qualify.
Technically, both of these programs could be considered no-down-payment mortgage loans. You can get a home loan through either of these options with nothing down. But aside from these two programs, I don’t think you’ll find a lender willing to offer a no-down-payment mortgage in 2012. In fact, many lenders are requiring down payments of 10 percent or more, for a conventional loan. With an FHA loan, you could pay as little as 3.5 percent down, depending on your credit score. We will talk more about these options in a moment.
No-Down-Payment Mortgages are Mostly Extinct
During the housing boom of the 1990s and early 2000s, it was possible to get a no-down-payment mortgage loan. Those were the days when lenders were giving home loans to anyone with a pulse and a Social Security Number, more or less. Those days are gone — and thankfully so.
When the housing market started to tank in 2008, mortgage lenders reconsidered their qualifying criteria. They increased standards across the board. Today (as compared to pre-housing crisis), borrowers will need higher credit scores, lower debt ratios, and larger down payments to qualify for a mortgage loan.
If you’ve been reading about no-down-payment mortgage loans on some other website, you might be reading outdated information. These types of articles were all over the Internet during the housing boom. Some of them are still around today. Much of this information is stale and inaccurate.
As I mentioned earlier, the VA and USDA loan programs are probably the only two ways to get a no-down-payment mortgage in 2012. I have not heard of any lenders waiving this requirement for conventional (non-governmental) loans — not since the housing market crashed.
Lending Requirements in 2012
Lenders today will require you to make a down payment of some kind when taking on a home loan. If you qualify for the VA or USDA program, you might be able to sidestep the down payment. Otherwise, you should be prepared to cough up 3.5 percent or more. If you qualify for the FHA loan program, you could put as little as 3.5 percent down on the mortgage. If you get a conventional mortgage (that’s not backed by the government), you will probably have to pay at least 5 percent.
There’s a stipulation with the FHA option, though. In order to qualify for the 3.5 percent down payment on an FHA mortgage, you will need to have a credit score of 580 or higher. If your score falls below that mark, you’ll have to put down at least 10 percent. These requirements took effect in 2011, and they should remain valid throughout 2012. Just keep in mind the Federal Housing Administration changes its program guidelines from time to time. So you should refer to their website for the most current information.
Aside from a no-down-payment mortgage loan, the FHA might be your best option for reducing your upfront costs. Of course, there are some disadvantages to the program as well. You can learn about those in this article.
Disclaimer: When it comes to mortgage lending, there are exceptions to almost every rule. Sometimes a lender will relax the requirements in one area if the borrower is strong in other areas. For instance, they may allow a smaller down payment for a borrower with excellent credit and very little debt. So don’t take any of this as gospel. I am reporting general trends here.
The 20-Percent Rule and PMI
You also need to be aware of the 20-percent rule, as it applies to private mortgage insurance (PMI). A no-down-payment mortgage will require extra insurance on the loan. If your home loan accounts for more than 80 percent of the property’s value (because you put down less than 20 percent), you’ll have to pay for PMI. This is added onto your monthly mortgage payment.
This insurance protects the lender against losses if you default on the loan. Statistically speaking, people who make smaller down payments are more likely to default. A “default” occurs when the homeowner stops making payments on the mortgage loan, for whatever reason. No-down-payment mortgages have a much higher rate of default than a loan with a down payment of, say, 10 percent or more. So lenders will seek extra insurance to protect them from this added risk. You might pay an extra $50 – $100 per month with PMI added on. The cost will vary based on the size of your loan. Private mortgage insurance for a high-end homes could easily exceed this range.
Of course, if you can’t afford a 20-percent down payment, you don’t have much of a choice. You will pay mortgage insurance of some kind, whether it’s through a private company (on conventional loans), or through the government (with FHA loans).
So, as you can see, there are pros and cons associated with a no-down-payment mortgage loan. For one thing, you’ll have a hard time finding such a loan in 2012. Aside from the two government programs mentioned earlier, there just aren’t many options for a buyer with no money to put down. And if you make a down payment below 20 percent, you will probably face the extra cost of PMI. It’s not necessarily a deal-breaker. It’s just something you need to be aware of, before you sign on the dotted line. Make sure you understand the full cost of your loan, with any insurance included.
This article answers the question: How do I get a no-down-payment home loan in 2012? If you’d like to learn more about the home buying process, credit scores, loans and related topics, you can use the search tool at the top of this page. We have thousands of articles on this website. So you’re bound to find something useful. Good luck with your mortgage search.