Homeownership is a goal for many people, but one that’s not getting easier to reach. As housing costs continue to rise, so does the amount you’d need for a substantial down payment, which can keep buying a house out of reach. Even if you can afford the mortgage payments, you’ll still have to save for your down payment and this might take a lot longer than you want to wait.
For many hopeful homeowners, zero-down mortgages are an intriguing possibility, but one that might seem too good to be true. They might be, depending on your circumstances.
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Buying a home can be easier and quicker without having to account for a down payment, but it’s important to understand how these mortgages work and the potential downsides you might face before deciding which mortgage option is the right move for you.
How a Zero-Down Mortgage Works
As the name suggests, a zero-down mortgage is a way to buy a house without any initial down payment. These mortgages are chiefly available through various government-backed loans, like Veteran Affairs (VA) loans for veterans and United States Department of Agriculture (USDA) loans for properties in eligible rural areas.
While these programs can eliminate the need to save for a large upfront payment, they come with fairly stringent eligibility criteria and can often include additional fees.
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Who Qualifies for Zero-Down Mortgages?
- Veterans: VA loans are specifically and only for current or former military personnel, whether active duty or veteran. These loans typically don’t require any down payment, which makes it much easier for those who have served in the armed forces to realize the dream of homeownership.
- Rural residents: USDA loans are only available for properties in designated rural areas and the only way to get this kind of loan is if you intend to purchase and live in a home away from bigger cities. Like VA loans, USDA loans don’t usually require a down payment. If living in the relative peace and quiet of the countryside appeals to you, a USDA loan might be a good fit.
3 Reasons Why a Zero-Down Mortgage Might Not Be a Good Idea
Higher Monthly Payments
One of the biggest downsides of zero-down mortgages is a higher monthly mortgage payment. Down payments diminish the amount of principal owed on a mortgage.
Without it, lenders will typically charge higher interest rates to offset the greater monetary risk. That means larger monthly payments, which can significantly impact your monthly budget and even your long-term financial stability.
No Equity
A zero-down payment mortgage also means you’ll be starting your homeowner journey with zero equity in your new home. This can be risky in a volatile housing market.
If property values fall before you pay down a significant portion of your mortgage, you could end up owing more on your mortgage than your home is actually worth. Equity can be an important financial buffer and not having it could force you to take a loss if you need to sell your house during a downturn.
Limited Options
Zero-down mortgages are generally unavailable outside of the government-backed programs mentioned above. This means you’ll have less choice in the availability of homes and fewer lender options.
Not all properties and financial institutions are eligible for or participate in these programs. The constraints these limitations bring can impose on your home-buying process and might mean you won’t be able to buy the exact home you want.
3 Reasons Why a Zero-Down Mortgage Might Be a Good Idea
Easier Homeownership
The single biggest advantage of a zero-down mortgage is that it puts homeownership within reach by eliminating the initial financial burden of a significant down payment. For many people, saving enough money for a down payment can take years. A zero-down mortgage means fast-track access to homeownership.
Potential for Wealth Building
Despite starting with zero equity, you’ll gradually build equity over time as you make regular monthly mortgage payments. Each mortgage payment represents not only the interest you’re paying but also goes toward the principal.
When you own more principal, you effectively own more of your home, which you could sell at some point in the future at a profit. This is especially true if you sell during a robust housing market when the value of your property may have increased.
Opportunity for First-Time Homebuyers
A zero-down mortgage can be a great option for first-time homebuyers, especially those who would otherwise struggle to save for a down payment. Zero-down mortgages can get first-time buyers into their own homes much faster and give them the stability they need to put down roots sooner rather than later.
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This article originally appeared on GOBankingRates.com: 3 Reasons a Zero-Down Mortgage Is Too Good To Be True, But Why It Might Still Work
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