Zero Down Mortgage Loan Programs

A variety of zero down conventional mortgage programs are available to assist home buyers (including first time home buyers) . Programs are sponsored by Fannie Mae and Freddie Mac that enable home buyers with good credit reports and credit scores to qualify for no money down loans up to the conventional loan limits (single family $333, 700, two family $427,150, three family $516,300, four family $641,650). Select Get Pre-Approved to find out whether a conventional zero down mortgage is best for you.

Fannie Mae & Freddie Mac Zero Down Mortgages

These programs run under various names and enable home buyers to borrower up to 100% of the value of the home purchase (100% loan to value or 100% LTV) as long as the home buyer contributes at least 3% of the home purchase price toward some combination of down payment, closing costs and pre-paid items. In most cases, the 3% can be gifted from immmediate family members. These 100% loan to value programs can be used with 30 year fixed rate loans, 15 year fixed rate loans and more recently, with adjustable rate mortgages (ARM).

While these loans minimize the down payment requirement of borrowers, they typically have a slightly higher interest rate than higher down payment mortgages. In addition, these loans require the home buyer to pay private mortgage insurance (PMI). Since loan to value plays an important role in determining the annual PMI premium, these loans tend to have high monthly monthly PMI payments, especially for adjustable rate zero down payment loans. Remember that a key disadvantage to PMI is that payments are not tax deductable like mortgage interest.

Strategies to Minimize PMI

One way to minimize the amount of the monthly private mortgage insurance premium is to use a conventional conforming mortgage with a down payment of 5% with the seller paying the home buyers remaining closing costs and pre-paid items. In this way, the home buyer has a nominally higher down payment, but avoids the higher mortgage insurance premiums associated with the zero down payment loan programs.

Alternative Zero Down Payment Mortgage Loans

It is possible to avoid PMI altogether by using structuring the home mortgage as two separate loans. The first mortgage is for 80% of the purchase price a second mortgage, typically a home equity line of credit as the second mortgage for 15% or 20% of the purchase price. In the so called 80 15 5 mortgage, the home buyer makes a down payment of 5% of the purchase price with the seller paying the home buyers closing costs and pre-paid items. In this way, the home buyer avoids the need for PMI. the home buyers total monthly payment is less, at times by a considerable amount. One draw back of this approach is that the home buyer is susceptible to rising interest rates since the second mortgage is normally a home equity loan tied to the prime interest rate. The first mortage can be either a 30 fixed mortgage, a 15 fixed or one of many possible ARMs.

In the 80 20 structure, few mortgage lenders will allow the seller to pay the home buyers closing costs and pre-paid items. However, where it is possible, the home buyer is able to purchase the home with no out of pocket expenses.

All the mortgage programs described above play an important role in New Jersey mortgage finance, New York mortgage finance and Pennsylvania mortgage finance.