Looking for a Zero-Down Mortgage? Here Are Three Options - Motley Fool

Sometimes, all that stands between you and homeownership is a down payment. If you have a steady income, faithfully pay your bills, and are ready to take on the challenges of owning a home, here are three types of mortgage that allow for zero down payment.

1. VA Loan

Service members, former service members, and their spouses qualify for mortgages backed by the U.S. Government. VA Loans offer a low interest rate and no down payment.

About

VA loans are provided by private lenders, including banks, credit unions, and private mortgage lenders. While the Veterans Administration does not make the loans directly, they do back them. In short, if you fail to make payments, the VA will compensate the lender. This guarantee is why lenders are willing to provide favorable terms, including no-down-payment loans.

Benefits

Getting into a VA home is just the first benefit. Once you're in and have built equity, VA loans allow for cash-out refinancing. They also provide a streamlined interest rate reduction refinance loan (IRRRL) for people who purchased their home when the interest rates were high but now want to take advantage of the low VA loan rates. Finally, VA loans help veterans with permanent service-related disabilities build or purchase a modified home to accommodate their disability.

Eligibility

If you meet one or more of the following criteria, you are eligible for a VA mortgage loan:

• Served 90 consecutive days of active service during wartime
• Served 181 days of active service during peacetime
• Have six years of service in the National Guard or Reserves
• Are the spouse of a service member who died in the line of duty or due to a service-related disability.

How to apply

To apply for a VA loan, you first need a Certificate of Eligibility (COE). Apply for your COE online or by mail. If you prefer to apply by mail, download VA Form 26-1880, fill it out, and send it to the address found on the third page of the form.

Once you have your COE in hand, it's time to find a lender. The best mortgage lenders are very familiar with the VA process, but if any questions arise, you can call the VA regional loan center at 877-827-3702.

2. USDA

Another mortgage that requires no down payment is offered by the USDA program. While USDA loans have traditionally been associated with rural properties, the definition has been expanded.

About

The U.S. Department of Agriculture (USDA) offers the Section 502 Guaranteed Loan Program with 100% financing. The program is designed to help low- and moderate-income households purchase homes in eligible areas. While these areas are historically referred to as "rural," USDA loans are also available on properties in small towns and suburbs.

With no money down, borrowers can buy, build, or rehab a house. The USDA even allows eligible buyers to relocate dwellings to an eligible area.

Benefits

For low- and moderate-income families, this program offers several impressive benefits, including:

• No down payment
• Competitive interest rates
• Low-cost mortgage insurance
• Ability to roll closing costs into the mortgage

Eligibility

To qualify for a USDA loan, you must:

• Have a minimum credit score of 650
• Use the funds to finance your primary home (it cannot be a working farm)
• Purchase a home located in a USDA-eligible area

How to apply

These seven steps make applying for a USDA loan easy:

1. Use a mortgage calculator to figure out how much mortgage you can afford
2. Find a USDA-approved lender
3. Fill out an application with the lender of your choice
4. Work with a real estate agent to find a USDA-approved home for sale
5. Make an offer on the home
6. Go through underwriting and final loan approval
7. Close on your loan

3. Owner finance

An owner-financed property can benefit both the seller and the buyer. For the seller, carrying the mortgage on a home can offer a higher interest rate than they might earn through other investments. For a buyer without money to put down on a house, a property financed by the owner represents a path to homeownership.

About

Let's say a homeowner has no mortgage and wants to sell their property. They have the cash available to make their next move, whether it's buying another house or traveling the country in an RV. If they sold their home outright, they could invest the money, but with current mortgage rates so low, it's possible they will earn more by carrying the mortgage on their house.

Rather than make a monthly payment to a bank, the buyer makes a monthly payment to the seller, and the house acts as collateral just as it would if the buyer was financing the purchase through a bank. That means that if the buyer misses payments, the owner can repossess the house, sell it, and recoup their loss.

Benefits

Owner finance deals can benefit all parties, particularly if everyone is open to working together. Here are some of the potential benefits:

• The buyer may land a mortgage with zero down: While some sellers require a down payment, others do not. In any case, the down payment is negotiable.
• The seller may earn a higher interest rate: Let's say the best short-term mortgage rate a seller finds is 3%. By charging 7% or 8% on the mortgage note, they achieve a higher interest rate for a set number of years.
• Owner-finance gives the buyer time to build their credit score: When the seller reports on-time payments to the credit bureau each month, the buyer's credit score is improved.

Eligibility

Because the homeowner acts as lender, eligibility requirements are up to them. They may check the buyer's credit score, ask for proof of income, or set up criteria of their own.

How to apply

The trick is finding an owner-financed property. Here are a few places to check:

• With your real estate agent
• On a public MLS website
• On a For Sale By Owner (FSBO) website
• Through friends and family

If you're ready to make a monthly mortgage payment, consider one of the zero-down-payment options available. Once you get your foot in the door as a homeowner, you're on the road to building equity.

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Looking for a Zero-Down Mortgage? Here Are Three Options - Motley Fool
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