Low down payment and no down payment mortgages played a significant role in the mortgage bubble that developed during the housing boom in the United States. When the housing market crashed, many of the families who had obtained mortgages with little or no down payment found their homes worth less than their mortgages and they had no ability to make their monthly mortgage payments. The reality of the situation was consumers were buying homes they could not possibly afford to keep over the long run.
Although it is difficult to obtain a no down payment or low down payment mortgage today, there are still avenues available to obtain these types of mortgages.
FHA Mortgage Loans
The Federal Housing Administration (FHA) has a loan program where they provide financial guarantees for individuals to obtain mortgages with down payments as low as 3.5%. Although the FHA actually doesn’t act as a direct lender, this federal agency insures loans by financial institutions that provides the financial institution security to offer low down payment mortgages.
Lower Credit Scores
The FHA will provide mortgages to potential home buyers with credit scores as low as 575. FHA mortgages come with restrictions. To begin with, there are caps on the house price related to the region the house is located in. Secondly, the home must be purchased to be used as a principal place of residence. FHA loans cannot be used to purchase investment property.
When an individual or family obtains a low down payment loan from the FHA, they are required to purchase private mortgage insurance. This private mortgage insurance protects the financial institution in the event the homeowner is unable to make his home payments or there is insufficient equity in the home to pay back the mortgage at time of the sale of the home. This private insurance program requires an up front insurance premium that is part of the underwriting costs of the loan. In addition, the homeowner must make monthly payments. Due to the additional private mortgage insurance premiums, the monthly mortgage payments on FHA loans are usually higher than those of conventional mortgage loans.
Veterans Administration Mortgage Loans
The Department of Veterans Affairs (VA) has a mortgage loan program for members in the military and former military members. This allows men and women who served their country to obtain a mortgage with no down payment. Similar to the FHA, the VA doesn’t actually make the loans. What they do is they provide insurance which motivates private lenders to participate in this program. There are specific eligibility requirements under the VA mortgage loan program. VA mortgage loans also carry fees at the time of closing, however they do not require private mortgage insurance, which is required under the FHA program. VA loans are an attractive means of purchasing homes for Americans who served their country in the military.
Private Financial Institutions
As indicated earlier in this article, low down payment and no down payment loans were part of the reason for the housing bubble that existed in this country for the past seven years. Although banks have become more aggressive in marketing conventional mortgage loans, new government regulations related to the Dodd-Frank Act which go into effect on January 10, 2014, will make it very unlikely financial institutions will pursue these type of mortgage loans in the future.
Elliot S. Schlissel is a foreclosure attorney with more than 45 years experience fighting foreclosure lawsuits. He represents homeowners with foreclosure problems in the metropolitan New York area.
