Do Little or No Down Payment Mortgages Save Money?

Aug 24, 2018, 11:12 AM | Robin Johnson
Little or no down payment



Are you planning to buy a home this year? If so, you probably want to find ways to cut down the high cost of the home-buying process—and you’re not alone.

Thankfully, the government has created a couple no down payment mortgage programs that don’t require buyers to put any money down, making homeownership more of a possibility for many Americans.

Options for No Down Payment Mortgages

While buying a home without a bunch of money saved up might sound impossible, it can be done! Thanks to the following government programs, hopeful homebuyers can afford to purchase their dream home:

1.USDA Loans –
Supported by the U.S. Department of Agriculture, USDA loans are given to homeowners looking to buy in rural or semi-rural areas.

In order to get this type of loan, the property must comply with the USDA's map of eligible areas. In addition, the total household income of the homeowners applying for the loan should be at or below 115% of the area's average income. Finally, if a buyer has a credit score of at least 640, then can qualify for streamlined processing.

Though USDA loans do require a 1% upfront fee (called the Guarantee Fee), this amount can be bundled into your full loan amount to avoid paying any out-of-pocket costs. In addition, USDA loans also have an annual fee of 0.35% that gets paid monthly in equal installments.


2. VA Loans – Designed to provide financial assistance for veterans, active-duty servicemembers, and their spouses during the homebuying process, a VA loan is often the easiest 100% home financing loan to get for qualified military personnel.

Like USDA loans, VA loans do not have minimum credit score requirements. This helps veterans with poor credit or less-than-ideal financial circumstances to still get the help they need to get a home loan.

The VA loan is also a notable method of buying a home with little to no up-front costs and low monthly costs. Unlike the USDA's annual fee that gets added on to your monthly payment, VA loans don’t require any monthly mortgage insurance fees, and VA applicants can negotiate to have the seller cover a majority, if not all, of the closing costs.

While USDA and VA loans are the only true 100% financing home loans, if you're willing to work with a sort-of loophole, there is another (still totally legal!) way to get into a house with no money down out of your own pocket.

This method involves either an FHA mortgage with a 3.5% down payment, or a conventional loan with a 3% down payment. Though both do require money down, that money can be gifted through an eligible down payment gift source, so you have the option of not needing to use your own personal money.

The money for this down payment can be gifted from a family member, non-profit organization, friend, or alternative third party.

In addition, those in certain professions, including teachers, police officers, firefighters, and other public employees, can qualify for the FHA's Good Neighbor Next Door loan, which requires just $100 down payment. Though it's not 100% financing, $100 is a really affordable way to purchase a home, especially when compared to the thousands of dollars typically required for a down payment.

Comparing the Costs of No Down Payment and Low Down Payment Loans



When comparing 100% financing home loans, FHA, and conventional loans with a 3% down payment, it can be helpful to break down the differences by numbers.

In this example, we'll use one borrower and compare the four different loan types. For the purposes of this comparison, let's call our borrower Susan.

Susan: A Case Study in Comparing Loan Types

    Susan, an Army veteran, has a 680 credit score and has found a house for $250,000 that she wants to buy in a rural area of Utah's Salt Lake County. She's planning on getting a fixed-rate loan with a 30-year term. In order to make an accurate calculation, let's also assume that Susan's annual property taxes would be $1,875 and her annual homeowner's insurance is $650.

    1. If Susan were to get a USDA loan, based on her credit score she could likely receive an interest rate of 4.625%.

    Based on all of the information, and using this calculator, it would cost Susan about $1,581.54 each month to own her home.

    Over the life of the loan, including all interest, fees, insurance costs, etc., she would end up paying a total of $569,352.82 for her home.



    2. If Susan were to get a VA loan, her credit score would likely qualify her for an interest rate of 4.750%. Because she's a first-time home buyer, her funding fee would likely be 2.15%.

    This means that Susan would pay about $1,542.57 each month to own her home, based on this VA loan calculator.

    Over the life of the loan, she would end up paying a total of about $555,326.48.



    3. For an FHA loan, let's say Susan's parents gift her the 3.5% down payment, so she doesn't have to pay that $8,750.

    Using this FHA loan calculator, Susan would end up paying about $1,643.37 each month to own her home.

    Over the life of the loan, she'd pay $600,363.43 for her home.

     

    4. Finally, if Susan gets a conventional loan that has a 3% down payment, her parents can gift her the $7,500. Because of her situation, she would likely pay 1.2% initially for private mortgage insurance (PMI).

    Based on this information and this calculator, Susan would pay $1,773.30 each month to own her home.

    Over the life of the loan, she would end up paying $586,717.13.

    In summary, here is a handy chart that shows both the monthly and long-term costs for each loan type:



               USDA

                VA

               FHA

        Conventional

    Monthly Cost:

            $1,581.54

          $1,542.57

          $1,643.37

           $1,773.30

    Lifetime Cost:

          $569,352.82

        $555,326.48

        $600,363.43

         $586,717.13

    As you can see, both no down payment options do save you money both on a monthly basis and over the life of the loan when compared to low down payment options (even if the down payments are gifted).

    No Down Payment vs. Standard Conventional Mortgages

    What about how no down payment mortgages stack up against standard conventional mortgages where the borrower pays either 10 or 20% down? Do they still save you money?

    For this scenario, we'll keep all of Susan's previous information the same. But we'll only compare her costs of a USDA or VA loan to a 10% down conventional loan, as well as a 20% down conventional.

    At 10% down, Susan would need to have saved $25,000 for her down payment (an amount her parents aren't likely to gift her). However, her PMI would likely drop down to 0.96%. Using the same inputs on the same conventional loan calculator as before, her monthly costs would end up being $1,615.51, and she'd end up paying around $581,184.45 ($556,184.45 in principal, interest, and fees + $25,000 down) to own her home at the end of 30 years.

    At 20% down, Susan would be paying $50,000 up front as a down payment (again, not something her parents are likely to gift her). But her PMI would drop to 0%, so she'd end up paying $1299.39 monthly and a total of $567,780.62 ($517,780,62 principal, interest, and fees + $50,000 down) to own her home at the end of the 30 years.

    Based on this information, a 10% down conventional loan is still more expensive than either no down payment option. A 20% down conventional loan, however, does end up being cheaper on a monthly basis, though a no down payment VA loan is still cheaper in the long term, and a low down payment USDA loan is only slightly more expensive after 30 years.


    So What Loan Should You Get?

    • If you don't have the money for a down payment, or if you only have a little, definitely go with either a USDA or VA loan, if you can.*

    • However, if you don't qualify for these loan types, and you have the money for a 20% down payment, a conventional loan is probably your best bet for overall savings and monthly costs.


    As one final note, based on your specific credit score, and other relevant information, the examples costs used here may be different. Before deciding on a specific loan type, it makes sense to discuss all of your options with a mortgage professional to see which one really would work best for your situation. And of our expert loan officers at Elevate Mortgage Group would be happy to help you.



    *Both USDA and VA loans have specific qualifications, so not every borrower will qualify. For USDA home loan qualifications, please check out this blog post. Or click here to learn more about VA loan eligibility requirements.

    Robin Johnson