Zero-down mortgages: Things to know

"Sold" sign in front of a recently purchased homeImage: "Sold" sign in front of a recently purchased home
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If you’re looking for a zero-down mortgage, you may be interested in learning about Bank of America’s new program.

A dramatic rise in U.S. home prices over the past couple of years has pushed homeownership beyond the reach of many — and rates of homeownership among Black and Hispanic Americans are particularly low, though Hispanic Americans have made some significant gains. With these inequities top of mind, Bank of America is rolling out zero-down-payment, zero-closing-cost mortgages with no required mortgage insurance for first-time buyers in five cities.

The bank’s new Community Affordable Loan Solution program is targeting areas in Dallas, Detroit, Los Angeles, Miami and Charlotte, N.C. that have larger Black and Hispanic populations — and it’s designed to eliminate key obstacles to becoming a homeowner. Chief among those hurdles is the typical down payment requirement of 20% of the purchase price.

The Community Affordable Loan Solution doesn’t require minimum credit scores and will use credit guidelines based on alternative factors that include timely rent, utilities, phone and auto insurance payments. The bank says that eligibility will be based on income and home location.

Before applying for this loan, prospective buyers will have to complete a homebuyer certification course by Bank of America and housing counseling partners approved by the U.S. Department of Housing and Urban Development.

If you have little or no cash savings, the chance to buy a house without having to make a down payment can sound too good to be true. But making a home purchase without paying some cash upfront isn’t risk-free. Read on to learn about the promise and potential pitfalls of zero-down loans.

What is a zero-down mortgage?

As the name suggests, zero-down mortgage loans require no down payment to purchase a home. Also known as 100% financing, a zero-down mortgage can get you into a home without having to make a large down payment, which is the cash you pay upfront in a real estate purchase.

But just how large is the typical down payment for a first-time homebuyer?

Forty-five percent of consumers thought they needed at least 16% for a down payment, according to a recent National Association of REALTORS’ survey. But you don’t really need that much. In fact, the typical down payment for first-time buyers has ranged between 6% and 7% since 2018, according to the real estate trade group.

While there may be a short-term benefit to taking out a zero-down loan, there are long-term advantages to putting down as much as you can. For example, many lenders require private mortgage insurance, known as PMI, on loans where you put down less than 20% of the purchase price. This protects your lender if you fail to repay the loan.

Plus, it’s likely that the more you can put down, the more equity you’ll have in the property. Your equity is the difference between your home’s value and how much you owe on the mortgage. When you’ve paid your mortgage in full, you’ll have 100% equity in the home.

Other benefits of a larger down payment could include a lower monthly mortgage payment and long-term savings as you pay less interest over time.

How to get a zero-down mortgage

If you’re buying a house for the first time and haven’t saved for a down payment, don’t despair. If you qualify, the federal government has a number of loan programs that allow you to buy a home without a down payment.

VA loans

If you’re an eligible service member, veteran or qualifying military spouse, you can get a VA loan to buy a home with no down payment — and you don’t have to pay monthly mortgage insurance. It’s also easy to qualify for a VA loan, even if your credit history isn’t great. There’s a funding fee for most borrowers though, which adds to the cost of your mortgage. Additionally, since they’re issued by private lenders, you’ll need to shop around for the best deal for your situation.

USDA loans

If you have low-to-moderate income and want to buy a home in a rural area, you might consider taking out a USDA loan, which is backed by the U.S. Department of Agriculture’s Rural Development program. Although eligibility isn’t limited to first-time homebuyers, these loans can be especially helpful if it’s your first time in the real estate market, because USDA loans generally don‘t require a down payment.

Bank of America’s zero-down loan

If you’re interested in Bank of America’s Community Affordable Loan Solution program, check out the press release for some of the eligibility criteria. The initial launch is limited to five cities.

Additionally, Bank of America offers a low down payment mortgage that may be of interest to potential homebuyers.

Potential problems with zero-down mortgages

Owning a home can help you build wealth over time as you pay your mortgage and your home appreciates in value. According to Freddie Mac, a government-controlled entity that buys mortgages from lenders, homes appreciate on average 3% a year nationally.

When you make a down payment on a home, you’ll likely have equity from Day One.

But with a zero-down loan, you’ll start out with little, if any, equity. If home prices fall and you need to sell, you can find yourself underwater, which means you owe more on your mortgage than what your home is worth. If this happens to you, it can be tough to sell or refinance.

What’s more, zero-down mortgages typically come with higher interest rates and other fees to cover the lender’s risk in making the loans. You’ll also typically need to pay PMI. Depending on your credit scores and total loan amount, an Urban Institute report found the cost of PMI typically ranges between 0.58% and 1.86% of your mortgage. 

Zero-down mortgage alternatives

There are a number of mortgage options that you may be able to qualify for that have minimum down payment requirements.

Some conventional mortgages, including HomeReady and Home Possible, can be obtained with a down payment of as little as 3%. A conventional loan is a mortgage issued by a private lender without going through a government program.

An FHA loan is a federally insured home loan that allows you to make a down payment as low as 3.5% if you qualify. These loans could be a good option if your credit isn’t great since they have an easier qualifying process than most conventional home loans. You’ll need minimum credit scores of 580 to qualify for a loan with a 3.5% down payment and 500 to qualify for one with a 10% down payment.

There are also some down payment assistant programs available that might help you build up a down payment.

Banks that offer loan assistance

Additionally, other private lenders — including TD Bank and Chase Home Lending — offer loan products designed to assist disadvantaged communities.

About the author: Brad Hanson is a senior editor at Credit Karma. His 30 years of experience in print and digital media includes work for the Los Angeles Times-Washington Post News Service, and Polyvore. Most recently before… Read more.