Learn About the Zero Money Down Mortgage Loans That Can Land You a Home Sooner Than You Ever Thought Possible

The allure of being able to buy a home with “Zero Money
Down” can be pretty strong if you’re short on down payment cash. Real Estate
investors who buy homes and flip them for a profit are also attracted to these
types of loans because they reduce the amount of capital that is tied up in
their property portfolio.

Is this a case of “Sounds too good to be true?”

These types of loans are written every day. Let’s take a
look and see if one of these zero money down mortgage programs is a fit for
your home buying needs.

The 100% Loan with PMI

Mortgage down payments are necessary buffers used by lenders
to protect themselves from potential loss due to the costs of foreclosing a
property in case of loan default.  A 20% down payment is considered sufficient
protection, and is therefore the industry standard.  Any amount less than that
will require some other method to reduce the lender’s risk.

One such method is private mortgage insurance, or PMI, which
is paid by the borrower for insuring the lender against loss.  You will have to
pay it until you have built up 20% equity in your home.

When obtaining this type of no money down loan, you are
simply taking out a mortgage loan for 100% of the home’s cost and paying PMI.

The 2/28 or 3/27 Loan

If you decide to take a 100% loan, you may be restricted to
2/28, 3/27 or similar loans, especially if you have low FICO scores or have
been determined to be a sub-prime borrower for any reason. Depending upon
whether it’s a 2/28 or 3/27 loan, the interest rate is fixed for the first two
or three years and then is variable for the remaining life of the loan.  Loans
in which the interest rate is fixed for a number or years and then becomes
variable rate are also known as hybrid loans.

If your FICO scores or whatever conditions caused you to be
classified as sub-prime can be remedied during the fixed interest rate period,
then you can apply for a more conventional mortgage before the variable rate
period starts.

The 80/20 Mortgage

This is one of the most common programs and it works like
this: The lender writes you a mortgage for 80% of the selling price of the home
and then either the same or an affiliated lender writes you a second mortgage
for the remaining 20% of the home’s value.

This is a good solution for avoiding PMI (Personal Mortgage
Insurance) payments for borrowers who do not have a 20% down payment available.

One of the down sides of this solution is that you usually
have to pay two sets of closing costs, but those costs will still be far below
what a typical 20% down payment runs.

In most cases your combined monthly payments won’t be
significantly higher than they would be with a conventional loan although you
will end up paying a slightly higher interest rate on the second mortgage. 
However, in many instances the specifics of a 80/20 loan deal make it cheaper
than taking a single mortgage and paying PMI.

The 100% Loan

This is the least complicated loans because it only requires
one lender to write one loan for 100% of the home’s selling price.

The interest rates can be significantly higher than with the
80/20 loan plus you will have to pay PMI until you have built up 20% equity in
your home.

VA Loan

If you are an honorably discharged veteran of the United
States Armed Forces then a VA (Veteran’s Administration) loan offers 100%
financing without incurring the penalty of having to pay PMI.

Lenders who participate in VA loan programs have less
stringent qualification requirements because the U.S. Government is guaranteeing
the borrower’s performance. This means that borrowers who might not otherwise
qualify for a mortgage can get qualified with a VA loan.

Other No Money Down Alternatives

There are other government loan programs which can get you
into a home with no down payment if you qualify for the terms and conditions. For
example, if you are buying a home in a rural area then you may qualify for a
USDA Rural Housing loan program.

The American Dream Down Payment Initiative law was
recently signed by President Bush and it offers another avenue into home
ownership. There are some qualification requirements including that you be a
first-time home buyer who is purchasing single-family housing that you intend
to live in. The term “single-family” includes conventional one-family housing,
a condominium or co-op, as well as a pre-manufactured or mobile home.

Even though the law says that you have to be a “first time
home buyer”, the actual definition states that a first-time home buyer can be a
person or married couple who have not owned their own home during the three
years prior to applying for a loan through the program.

The Federal Housing Administration (FHA) offers low income
first time home buyers the chance for home ownership with just a 3% down
payment. They have the resources available to steer the borrower towards other
Government “down payment assistance programs” which can end up resulting in a
zero money down loan in the end.

HUD is in the process of getting a true “Zero Down” program
launched and it is expected to become available during 2005 if Congress passes
the legal changes required to make it law. Not only does HUD want to offer Zero
Down loans, but they want to allow the borrower to roll some of the closing
costs into the loan up to a maximum loan value of 103% of the selling price.

Many State and local/county governments also offer first-time
home buyers and other targeted groups the opportunity to participate in
programs which offer no money down loans.

Your best bet for finding any zero down programs is to do
some research yourself and enlist the aid of a mortgage broker who specializes in
zero money down mortgage programs.