The thought of buying a home with no down payment is the ideal situation for many prospective homeowners. A lot of people know they would be able to make the monthly payments and keep a mortgage going, they just don’t have the means to come up with anything on the front end.
This was never really an issue, as zero down payment options were offered by many lenders. However, the rules have changed and no down payment is just one of many things that has changed when getting a mortgage.
Five Percent Minimum
Today, there is a minimum down payment amount of 5% of the purchase price. If you are planning to purchase a home but not live in it, the minimum down payment is at 20%. These changes were made by the federal government and the five per cent rule has caused some anxiety to many first-time homebuyers.
Changes were also made to the maximum amortization period, which went from 40 years, down to 25 years. If you are refinancing, you can now borrow a maximum of 80% of the home’s value, which is down from 95%.
Getting Creative
Naturally, different lenders will try to find ways around the minimum down payment rules. If you see mortgages advertised as “cash back” or “free down payment” this usually equates to a zero down payment once the process is complete.
With these mortgages, the lender will offer a 5% cash back that’s paid to your lawyer when the deal closes. Along with the 95% financing you received to buy the home, the cash back works out to 100% financing. You’ll end up paying back that cash back amount during the course of the mortgage, and the interest rate will be higher, but it will still technically be a zero down payment mortgage.
The Bigger the Better
These cash back plans aren’t necessarily bad, and they do enable some people to get into home ownership when they might not have been able to, but a bigger down payment is always better. The more you’re able to pay up front, the less you’ll have to pay in interest over the course of the mortgage.
Yes, that is the future and the future doesn’t seem relevamnt to a lot of people, but you can save tens of thousand of dollars and have your house paid off years sooner with a bigger down payment. If you can’t get it you can’t get it, but don’t jump at a zero down payment option just because you can.
