Feb 23 2022

Buying a Home with No Down Payment

Let’s look at how one can buy a home with zero money down with an 80/20 mortgage.
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Saving enough money to make a down payment on a home is at times the most difficult task that would-be homeowners face, and one that often prevents people from getting their dream homes. Even putting away the bare minimum of 3% down can be an insurmountable obstacle for some. For many of these folks, an 80/20 piggyback loan may be the solution. Let’s look at how one can buy a home with zero money down with an 80/20 mortgage.

What exactly is an 80/20 mortgage?

When you use an 80/20 mortgage to buy a home with no money down, you’re making one purchase with two separate loans. The first loan goes toward 80% of a house’s selling price; the second, as you may have guessed, is used to cover the remaining 20% of the home’s cost. The first is a traditional mortgage loan, often with a 30-year term at a fixed interest rate. The second loan is usually either a 15-year home equity line of credit or a similar home equity loan, often with a variable interest rate.

When closing on an 80/20 mortgage, the buyer will finalize two distinct loans, and each month needs to make two separate mortgage payments. Does it all sound somewhat convoluted, and maybe even unnecessary? It’s not. Here’s why.

Why use a pair of loans to purchase a house?

Most borrowers look to 80/20 loans to get two benefits: no down payment and the avoidance of having to pay private mortgage insurance (PMI) each month. The tactic does something of an end-run around a more traditional mortgage in which private insurance is required if the homebuyer puts down less than 20% of the cost of the home. Normally, when little or no money is put down on a home, lenders want the security that PMI provides in the event that there’s a default. However, with an 80/20 mortgage loan, the 20% that would normally need to be put down is covered by its own mortgage, so PMI isn’t necessary.

Who qualifies for an 80/20 mortgage?

As 80/20 loans do carry some risk for the lender, borrowers often need to have higher credit scores than they would need for some other types of mortgage loans. Lenders generally want a credit score of at least 700 and like the borrower to have a low debt-to-income (DTI) ratio, 45% or below is usually preferred. Plus, potential borrowers will have better chances of getting approved for an 80/20 mortgage if they have solid employment records, steady residency histories, and a reasonable amount of savings in the bank. While no single one of these factors will be determinative of approval, these are the main things that lenders will probably consider.

What are some of the benefits of an 80/20 mortgage?

Flexibility is a big one. As the second loan for 20% will likely be a home equity line of credit, its use isn’t limited to just paying off the home. After you pay down a portion of that loan, the credit line can then be used for any number of purposes, including the popular choice of cash for home improvements. Then there are tax benefits to consider with an 80/20 mortgage, as interest on mortgage loans — including home equity loans — may be tax deductible.

Do 80/20 loans have any restrictions I should know about?

This varies from case to case and lender to lender. There can be a cap on the amount of the second loan that’s for 20%, perhaps a limit of $100,000. A common requirement set by lenders for 80/20 mortgages is that the borrower lives in the home, using it as their primary residence, so purchasing investment properties isn’t generally possible with the 80/20 route.

What are some costs to consider with 80/20 mortgages?

As you will be closing on two mortgages when you buy your home, you may have to pay the closing costs on each. Though some lenders overlap these costs when issuing 80/20 mortgages. While closing costs on home equity lines of credit (HELOC) are usually lower than those for primary mortgages, they are not insubstantial, usually between 2% and 5% of the loan’s amount. And bear in mind that if the second loan is at a variable rate, that rate has the potential to rise; the historically low interest rates of the recent past were always bound to increase.

VA Loans: Another Way to Buy With No Money Down

An 80/20 mortgage isn’t the only option for putting zero money down on a home. Backed by the U.S. Department of Veterans Affairs, VA loans don’t require a down payment because the government guarantees that the lender will recoup up to 25% of the loan’s amount in the event of default. These loans are available to active-duty members of the military, veterans, and some surviving spouses, all verified as eligible with certificates of eligibility (COEs) they receive from the Department of Veterans Affairs. Beyond the no-money-down aspect, a big benefit of a VA loan is that you don’t have to get mortgage insurance as you do with other types of mortgages when there’s a down payment of less than 20%.

What are some requirements for VA loans? All eligible buyers must live in the homes they’re getting the loans for; VA loans can’t be used to buy investment properties. And there are generally funding fees to consider with VA loans, though some borrowers may be able to get these waived, as is the case with some disabled veterans and recipients of Purple Hearts.

Do you feel it’s time you owned your own home but don’t have quite enough cash for the down payment? If you’re on solid financial ground, an 80/20 mortgage may be the best way to realize your dream of becoming a homeowner. Contact us today to talk about how you may be able to buy a home with no money down.

These days, more and more people are looking to buy their dream homes, especially as remote work and work-from-home setups have become an enduring trend. A 15 point increase in requests for home tours and other home-buying services, along with a 11% rise in Google searches for homes, indicate an uptick in demand to buy houses in the country. However, there is a definite worry about affordability when it comes to housing, especially as hefty price tags on available residences have kept the market just as competitive as before, if not more.

According to the latest reports from analysts, it’s not all bad for existing homebuyers and aspiring house hunters. As previous data shows, timing matters in the housing market, and working on different approaches to home buying – like through a reliable lender – can help advance you towards more affordable housing goals. Below, we discuss whether house hunters should buy now or wait, and why.

 

What is your financial situation?


Counter to the rise in home demand, there is a considerable lack of supply. Along with rising prices and interest rates, the housing market may seem like a highly competitive space with wealthy homeowners fighting for what little property is left. It can be overwhelming, but knowing where you stand financially can help you better strategize your home buying journey. Following the four key components of affordability, ask yourself:

  • How much do you have saved for a down payment?

  • How much does your household earn?

  • What debts do you carry?

  • What is your credit score?

 

Familiarizing yourself with these components will help inform your decision on whether or not to wait. For example, taking the time to improve your credit scores before committing can save you from higher interest rates in terms of your monthly mortgage payments. Alternatively, many young homebuyers are compromising by living with family for a significant amount time to save up for a down payment. Getting this out of the way when you’re able to can help you get better loans to buy sooner than later in case interest rates end up increasing.

What kind of home is best for you?

Buying a home is a huge purchase and a big commitment. With shifts to digital and remote ways of working taking place in recent years, this has provided homebuyers with opportunities to be more flexible when buying homes. Homes in areas away from busy cities and urban hubs, for example, are considerably cheaper. This makes them a perfect option for buyers who work from home, or aren’t required to be present in the office on a consistent basis.

The lifestyle you expect to live is as much a factor to consider as money. Condos and townhouses offer lower maintenance costs in the long run, and are perfect for smaller households when compared to single-family homes. If the household grows, homebuyers looking for a side income can even invest in renting out purchased properties to passively earn back what they spent and look into bigger properties for family use.

What does the future look like?


In a previous post, we talked about the rising mortgage and interest rates. While the market may seem bleak or intimidating in its current condition, housing experts also believe factors such as supply have a high chance of returning to pre-pandemic levels by the end of 2024. If you are financially able, buying now while others may be intimidated by the prices can give you an edge. Conversely, taking some time to get your finances in order can benefit you when it comes to securing better loans and lower interest rates.

Working with experts can help you make better decisions for the loans you need, making sure you don’t get trapped with high interest rates or hidden charges. The future of fintech suggests that big data is the future of loans, as more online lenders are now using algorithms, which predict potential defaults better than FICO scores do. Data is also leveraged precisely to identify customers who fit various products well — which can give you peace of mind, as an aspiring borrower. Here at City Lending for example, we find the right programs to fit your needs and profile, making sure you get some of the lowest down payments and interest rates along with a premium service.

And if you’re still unsure, it’s worth considering that waiting it out in the market’s current wild conditions could result in even higher interest rates in the future. At the end of the day, buying a house is ultimately a huge investment, which comes with benefits such as privacy and a financial investment that for the most part will weather most economic storms.

Find out if this is the right time for you to get a house by contacting one of our loan officers today.

 

Content intended only for the use of citylendinginc.com

Written by Alicia Christopher

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