What is the point of a zero-down payment mortgage?
The point is to make homeownership — to Indianapolis homebuyers or anyone — accessible to people who have challenges to saving the traditional twenty percent of the cost of a home. Since most financial institutions are not interested in assuming the risk that zero-down mortgages present, there are only a few zero-down options available.
So, here are the four ways to get a mortgage without putting a single penny down:
Veteran’s Administration (VA) loans
Guaranteed by the government, (in this case, the Veteran’s Administration) a VA loan is considered one of the best perks of military service. Let’s define veteran first: It does NOT mean that a member of the armed forces needed to have fought in a conflict. (This can be an area of confusion, even for the veteran. Last year in Indianapolis, the Veteran’s Court in Marion county had to stop asking, “Are you a veteran?” and ask, “Have you ever served in the military?” to avoid the misperception that a citizen had to have served in a war to take advantage of services.)
There is a wide array of eligibility guidelines and evidence required depending on length and time of service. One commonality is that a service member must acquire a Certificate of Eligibility, and you can apply for one online.
Some additional facts on the VA loans:
- You can use your loan eligibility more than once.
- There are different programs for service members with disabilities and Native American veterans
- The Indianapolis VA office is downtown in the Minton-Capehart Federal Building at 575 North Pennsylvania. The phone number is 800-827-1000. More information is at the Indiana Department of Veteran’s Affairs website.
- No private mortgage insurance (PMI) is required.
- There are special programs for refinancing.
- If you had a dishonorable discharge from the military, you are ineligible. Honorable and general discharges? You’re good-to-go.
Navy Federal Credit Union
Another option for military personnel is NOT guaranteed by the government; rather is a direct mortgage insured by the National Credit Union Administration. (NCUA.) The eligibility criteria for their HomeBuyers Choice Mortgage is a bit broader here, extending to civilian employees of the Department of Defense (DoD), and contractors assigned to DoD installations.
Some additional facts on the NFCU loans:
- You must be a first-time homebuyer.
- PMI will not be required
- Check your eligibility to become a member of the Navy Federal Credit Union first.
United States Department of Agriculture (USDA) Rural Development Agency
The most important aspect of a loan through the USDA is not the eligibility of the person, but of the location of the property itself. It must be in a designated rural area of the US. Why is this such an important program? According to Rural Housing Service Administrator Tony Hernandez, (Washington, DC) “The USDA Rural Development’s Single Family Housing Programs are integral to the development of rural communities and the rural economy. These programs expand access to homeownership and stabilizes rural families and communities.”
So, what’s considered rural?
The definition was revised by the 2014 Farm Bill, but it is based on population and accessibility to financing for low-to-moderate income families. New census data is being rolled out and applied, so of course as populations change, so does the definition of rural. Don’t assume — always check. Because the data can work both ways; if a home you are interested in purchasing is in an area using old census data to determine population, it may still be considered rural. You can check a specific address first.
Some additional facts on the USDA Rural Development loans:
- The USDA has two types of loans: Direct and Guaranteed. In the guaranteed program, the government guarantees the lender will get paid if the home owner defaults. In the direct loan, the USDA loans money to the homeowner directly. The direct loan is tailored to very low income homebuyers.
- Be sure to check income eligibility for either program.
- This is a robust program in Indiana. According to Darrell Mowery, Public Affairs Specialist in the USDA’s Rural Development Office in Indianapolis, “Money spent in Indiana with both the direct and guaranteed programs combined in 2014FY was over $560 million.”
- Borrowers of either type of loan, direct or guaranteed, can borrow again if their first debt is satisfied. They can also refinance through one of the USDA’s refinance programs.
- With the guaranteed program, borrowers for newly constructed homes have a ‘single close’ option that provides both construction and long-term mortgage financing without requiring two loan closings. This feature can reduce borrower costs substantially.
According to Jay Fletcher, Communications Manager, Legislative and Public Affairs Staff, USDA Rural Development Office in Washington DC, this is a robust program on a national level too. 2014FY figures were hot off the press: $808 million in Direct Home loans and over $19 billion in Guaranteed Home loans for single family mortgages. “The money is out there for eligible homebuyers,” he said.
Gift Money for a Down Payment
The bottom line on gifts is this: If you know that you’ll be getting a large financial gift for your down payment, be prepared to document it for your mortgage company, with a ‘gift letter’ from that generous relative or friend. The bank wants to know that the money really is a gift, and not a loan that will add to your debt burden — something they would need to consider when reviewing your mortgage application. Different types of loans have different rules on how much of a downpayment can be a gift; be sure to understand the details. This is a widely used route to a zero-down mortgage.
Yes, zero down mortgages are out there! Homeownership is a hallmark of a robust community, and there are programs to help. Let our agents help point you in the right direction.