Should I Finance 100% of My Home Value?

What is a zero-down payment mortgage?

Buying a home with no down payment sounds pretty nice right about now, huh? Well, it can be; then again, 100 percent mortgage financing can be problematic under the wrong circumstances. This blog is intended to help you make an informed decision with the help of a qualified lender.

My preferred lender, Sam Ivey with Academy Mortgage said zero down financing is a good option if you are looking to get into a home immediately and are not able to raise the down payment. “Anytime you’re taking a loan out there are risks. Sometimes making the down payment is the biggest hurdle for people wanting to become homeowners,” he said.

Ivey told a story of some friends who desperately wanted to buy a home in about 2021. He advised them to roll the dice and take out a zero-down loan instead of waiting until they could afford the down payment. “They elected to continue to rent and now prices are higher than they were and they will have to keep renting,” he said. The decision to wait was part of their self-imposed financial limit. It’s great to have those but you need to look at all angles.

From 2021 to 2022, the median sold price of homes in Salt Lake County increased by 14.35 percent according to data published by the Wasatch Front Regional Multiple Listing Service. In 2023, the sold price had decreased by 3.04 percent; however, the median sold price was still 10.87 percent higher than it was in 2021. “My friends are still kicking themselves,” Ivey said.

In this blog, I’ll define the 100 percent mortgage loan and discuss some factors that can influence your ability to secure such a loan. With the help of my preferred lender, Sam Ivey, Academy Mortgage, we’ll look at some of the scenarios in which this type of mortgage just might work for you. Then we’ll talk about situations that make it best to avoid a zero-down payment loan. In the end, you and your lender will weigh all the factors to make an educated, sound decision about your financial future.

This kind of mortgage has a few different names:

• 100 percent mortgage
• Zero down payment mortgage
• 100% Financing

All these terms refer to a loan for 100 percent of a home’s purchase price. In a traditional mortgage, borrowers typically contribute a percentage of the home’s purchase price as a down payment. It’s common for that cost to be 3 percent to 20 percent.

A down payment reduces the lender’s risk; which often translates to better terms for the borrower. It also gives the borrower a cushion of equity in case of rough economic (private or public) conditions.

Will I still have to bring money to closing?

Does this mean you can walk away with your own home without paying any money upfront? Probably not. Some closing costs can be built into the loan, but the more you borrow, the deeper you get into a negative value-to-loan scenario. Only you and your lender (with input from a qualified real estate professional) can help you determine the most practical path forward.

There are many other expenses you should plan to pay including the following:

• Closing costs: These are fees associated with the closing of the real estate transaction. They can include items such as loan origination fees, title insurance, attorney fees, appraisal fees, and escrow fees.
• Property taxes: Depending on the timing of your closing, you may need to pay property taxes for a certain period upfront.
• Homeowners insurance: Lenders usually require homeowners insurance, and you may need to pay for the first year’s premium at closing.
• Prepaid interest: You might need to pay interest on your mortgage loan from the closing date until the end of the month.
• Private mortgage insurance (PMI): If your loan requires PMI, you might need to make an upfront payment at closing.
• Homeowners Association (HOA) fees: If you’re buying a property in a community with an HOA, you might need to pay fees at closing.

Your lender will give you a Loan Estimate early in the process. There are strict laws to make the lending process completely transparent. The loan estimate will outline closing costs associated with your mortgage loan. With the help of a skilled negotiator, the buyer might persuade the seller to pay some of the closing costs. In some cases, the seller will offer to help pay them as an added incentive for the right buyer.

While a 100 percent mortgage covers the purchase price of the home, there are other costs you will be expected to pay. Budget for closing costs. No buyer is likely to be left alone to figure out the cost. If you work with a professional lender and a professional real estate agent, you will be fully informed every step of the way. There should be no surprises at closing.

A zero down payment mortgage can reduce the amount of money you are required to pay at closing; remember there are pros and cons to just about everything in life.

When should I use zero-down financing?

Right about now, you might be thinking this no-down payment mortgage is sounding pretty nifty. There are some benefits and drawbacks to mortgaging your new home to the hilt. It’s time to talk about the pros and cons.

PROS

Here are some scenarios when you might consider a no-down payment mortgage:

1. Limited savings: If you have limited savings for a down payment, a no-down payment mortgage allows you to enter the real estate market without the need for a substantial upfront cash payment. This can be particularly beneficial for first-time homebuyers who may be focused on building their savings.
2. Immediate homeownership goals: If you have a strong desire to own a home and don’t want to wait to accumulate a down payment, a no-down payment mortgage provides an opportunity to achieve homeownership sooner.
3. Favorable loan terms: In some cases, you may find that the terms and interest rates offered for a no-down payment mortgage are competitive, making it an attractive option compared to other financing alternatives.
4. Rising property values: If you anticipate that property values in your desired location will increase over time, you may consider a no-down payment mortgage as a way to benefit from potential equity growth without an initial investment.
5. Military service: If you are eligible for a VA loan, which is a no-down payment mortgage option for veterans and active-duty military personnel, it can be a compelling choice due to the favorable terms offered by the Department of Veterans Affairs.
6. You plan to invest the cash: If you have a killer investment opportunity that will bring you a higher yield than you will save by making a down payment, that would also be a good time to consider this type of financing.

CONS

• Higher Interest Rates: No-down payment mortgages can come with higher interest rates, increasing the overall cost of the loan.
• Private Mortgage Insurance (PMI): If your loan requires PMI, it will factor into your monthly payments.
• Limited Initial Equity: Without a down payment, your initial equity in the home is minimal, and it might take time to build equity through regular mortgage payments.
• Stricter Credit Requirements: Lenders might have stricter credit score requirements for 100 percent mortgages.

What factors should I consider before getting a zero down payment mortgage?

Before opting for a zero-down payment mortgage, there are several factors you should carefully consider. (Tip: state, local, and federal assistance programs can run out of money. Plan to apply at the beginning of the year.):

1. Interest rates: Zero down payment mortgages might come with higher interest rates compared to traditional mortgages. Be sure to compare interest rates and understand the long-term financial implications.
2. Loan terms: Examine the terms of the mortgage, including the length of the loan (15, 30 years, etc.). Longer loan terms may result in paying more interest over time.
3. Private mortgage insurance (PMI): With a zero down payment, you may be required to pay for PMI, which protects the lender in case of default. Consider the additional cost of PMI and how it affects your monthly payments.
4. Credit score: Your credit score plays an important role in mortgage approval and the interest rate you’ll receive. A higher credit score often leads to better loan terms.
5. Stability of income: Assess the stability of your income. A steady income is important for making mortgage payments on time.
6. Debt-to-income ratio: Lenders evaluate your debt-to-income ratio. A good lender is as invested in your ability to make your mortgage payments as you are. Your mortgage security depends on your honest answers. A lender is trained to help you make a sound financial decision. Never inflate the value of your assets or income. Don’t downplay your expenses.
7. Homeownership costs: Homeownership comes with additional costs beyond the mortgage, such as property taxes, homeowners insurance, and maintenance. Consider these expenses when you review your family budget.
8. Market conditions: Consider the current real estate market conditions. In a competitive market, sellers may prefer buyers with more substantial down payments.
9. Future financial goals: Evaluate your long-term financial goals. A zero down payment might allow you to enter the housing market sooner, but make sure it fits your overall financial plan.
10. Resale value: Think about the potential resale value of the property. If property values decline, you could end up owing more than the home is worth.

What are some alternatives to 100 percent financing?

There are several alternatives to a zero down payment mortgage. Your financial situation, employment history, and credit record will all impact your ability to participate in many of these programs. Here are some options:

1. Traditional mortgage with down payment:
   • Save for a down payment (typically 20% of the home’s purchase price on a conventional loan) and secure a traditional mortgage. A larger down payment often results in lower interest rates and better loan terms.
2. FHA loans:
   • Federal Housing Administration (FHA) loans require a smaller down payment (usually 3.5%). These loans are insured by the government, making them accessible to borrowers with lower credit scores.
3. VA loans:
   • If you are a military veteran, you may be eligible for a VA (Veterans Affairs) loan, which often requires no down payment. VA loans offer competitive interest rates.
4. USDA loans:
   • The U.S. Department of Agriculture (USDA) offers loans for rural and suburban homebuyers with low to moderate incomes. USDA loans may require no down payment.
5. State and local down payment assistance programs:
   • Many states and local governments offer down payment assistance programs to help first-time homebuyers. These programs may provide grants, loans, or tax credits to cover part or all of the down payment.
6. Conventional loans with lower down payments:
   • Some conventional loans allow for down payments as low as 3%. Explore options from private lenders that offer lower down payment requirements.
7. Piggyback loans:
   • A piggyback loan involves taking out two separate loans simultaneously – one for the mortgage and another for the down payment. This may help you avoid paying private mortgage insurance (PMI).
8. Gifted down payment:
   • Family members may provide a monetary gift to assist with the down payment. Be sure to follow the lender’s guidelines for gifted funds.
9. Seller financing:
   • In some cases, sellers offer financing options. This arrangement involves the seller acting as the lender, allowing you to make payments directly to them. This kind of financing is hard to find in a robust seller’s market.
10. Rent-to-own agreements:
    • Consider a rent-to-own agreement where a portion of your rent goes towards building equity in the property. This can give you time to save for a down payment.
11. Homebuyer education programs:
    • Some organizations and lenders offer education programs that provide financial counseling and assistance to help potential homebuyers prepare for homeownership.

Before making a decision, carefully assess your financial situation, research available options, and consult with mortgage professionals to determine the best fit for your needs and goals.

Tips for successful zero down mortgage financing

Build a strong credit score

A great credit score is golden. Your ability and willingness to pay your debts on time and as expected can save you thousands of dollars over your lifetime.

Use credit, but use it wisely. Pay your debts when they are due and keep your debt-to-income ratio low. Sign up for a free credit monitoring service to monitor items reported on demand.

Shop for the best loan terms

Talk to at least three lenders and compare their best rates and terms based on your scenario.

Save for closing costs

It is not always possible to save for a down payment, but consider putting some money away to help with your home purchase to get more favorable rates and conditions.

Understand Loan Terms and Agreements

Stop at each step in the home-buying process and check your understanding of all loan terms and agreements. Ask as many questions as you must to clear up any confusion.

Ivey said real estate is one of the most popular wealth-building tools in Utah. Home prices on the Wasatch Front have dropped slightly, but are way up from where they were five years ago. As you search for your first or your next real estate investment, get and stay informed. We will do all we can to help. You are always welcome to call on me to help answer your real estate questions.