For many millennials saddled with student loan debt, owning a home feels out of reach. When so much of your income goes to paying down debt, saving up for a down payment can feel impossible. While zero-down mortgages might seem like a golden opportunity, it’s important to proceed with caution. These types of loans could hurt your financial standing in the long run.
What is a Zero-Down Loan?
A zero-down loan is exactly how it sounds — a loan that requires no down payment to purchase a home. These types of loans appeal to those with little to no savings, bad credit or unstable employment. Zero-down loans exploded during the real estate boom from 2003 to 2006, giving many borrowers without much financial clout the chance to own a home.
The Catch
Unfortunately, for many zero-down loan borrowers in the early 2000’s, once home values dropped, they were in over their heads. They owed more on the loan than the house was worth, and if they experienced a financial setback, like a job loss, they couldn’t keep up with the payments.
As a result, underwriting contracts got stricter, and zero-down mortgages became less popular. Today there are some zero-down loan options that usually include higher interest rates and fees to cover the lender’s risk of underwriting them.
For some borrowers, a zero-down mortgage can be a good financial move. But it’s important to evaluate your circumstances before jumping into one.
How to Determine if a Zero-Down Mortgage is Right For You
Before signing up for a mortgage that requires little to no money down, ask yourself if you can still handle the payments if you lose your job. If not, you might want to consider waiting to purchase a home, and aggressively saving for a down payment that would make your monthly mortgage payments more manageable. Keep in mind that a mortgage payment is just the beginning of costs associated with owning a home, and it’s important to factor in other costs like unexpected repairs, maintenance and utility payments.
Lastly, compare the mortgage payment of the property to the potential rental price. If necessary, could you cover the mortgage payment and other costs by temporarily renting out the property? If so, a zero-down loan could be less risky for you.
If you are able to put some money down, a zero-down loan is likely not a good option for you since these loans come with higher interest rates and fees. If you’re intrigued by these loans, take some time to look at your overall financial picture to determine if a zero-down mortgage is the best choice for you.
~Here’s to Your Success!
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