Part 1: What is a Zero Down Mortgage, How Does it Work, Who Can Get a Zero Down Payment Mortgage
Part 2: Advantages and Disadvantages of Zero Down Mortgages, Should You Get It
Introduction to a Zero Down Mortgage for Kids and Teens
This video explains the concept of a zero down mortgage in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about zero down payment mortgages, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is a zero down mortgage
- How do zero down mortgages work
- Who can get a zero down mortgage
- What are the advantages of zero down mortgages
- What are the disadvantages of zero down payment mortgages
- Should you get a zero down mortgage
What is a zero down mortgage?
However, a zero down mortgage is a type of mortgage that requires no down payment, as the lender finances 100% of the home’s purchase price.
They were very popular among private lenders before the housing market crash of 2008. But today, very few private lenders offer these, and only to people who meet certain eligibility criteria like adequate income and high credit score.
Most zero down mortgages today are offered by public programs like VA loans, USDA Loans and Navy Federal Loans.
How do zero down mortgages work?
In a regular mortgage, lenders require buyers to put a down payment to reduce the risk the lender is assuming, as the buyer would have some stake in the home and is less likely to default. After this, the buyer makes monthly payments until the loan is fully paid off with interest.
However, in zero-down mortgage loans, the lender assumes 100% risk as the home buyers do not put down any money upfront. To compensate for this, the lenders usually have very stringent income and credit history requirements for buyers to qualify.
The rate of interest is also higher than a traditional mortgage, and there could be additional charges like private mortgage insurance (PMI), upfront guarantee fee, upfront funding fee, etc.
If the buyer doesn’t want to pay anything upfront, these charges can be rolled into the mortgage, which increases the monthly payment.
While the buyer starts with no equity in the home, they build equity by making monthly payments – just as with a regular mortgage.
Who can get a zero down mortgage? Who qualifies for it?
Usually, 0% down mortgages are given to people with low to moderate income who meet certain credit requirements – especially first time homebuyers who will be using the home as a primary residence.
VA loans are provided by the U.S. Department of Veterans Affairs to U.S. military personnel and spouses.
US Department of Agriculture (USDA) loans are provided to people with low to moderate income looking to buy a home in a designated rural area.
Doctor Loan Program is another program that offers zero-down mortgages for medical professionals.
Although rare, zero down mortgages are also offered by some credit unions to their members. Navy Federal Credit Union is one such entity, offering zero down loans to military personnel, U.S. Department of Defense employees, and their family members.
Private lenders offering these loans aren’t common because of the huge risk involved.
What are the advantages of zero down mortgages?
Saving up enough money for a down payment is difficult and can take several years. For example, if you are putting a down payment of 20 percent on a home worth $300,000, you would need to save $60,000 upfront.
A zero down payment mortgage eliminates this problem by not requiring any down payment, making the process of purchasing a home faster and easier.
What are the disadvantages of zero down payment mortgages?
Firstly, zero down mortgages usually have a higher interest rate and other fees, because the lender takes on a higher risk. And depending on the lender, you will also likely need to buy Private Mortgage Insurance (PMI), and pay an upfront guarantee fee or funding fee.
The borrowers can roll these charges into the mortgage, but that will only make their monthly payments higher.
You will also need to take out a larger mortgage since you aren’t paying for any of the home’s value in the form of a down payment.
All these factors combined result in the monthly payments being significantly higher than those for a traditional mortgage.
Also, there are not many options for getting a zero down loan, and people without good credit might struggle to get approved.
Should I get a zero down mortgage?
In most cases, if you can afford a down payment, it is best to avoid zero down loans. Their higher interest rate, fees, and monthly payments mean that they are usually not the best choice.
Instead, you can go with a low-down payment loan like an FHA loan or a conventional mortgage with a low down payment. This could lead to thousands of dollars of savings over the life of the mortgage.