What is a Zero Down Mortgage?

Buying a house is often much different than it sounds. Most people do not pay the full price of a house in cash. Only a portion of the sale price – known as the down payment – is usually paid in cash. The remaining balance is then financed by a third party, such as a bank. A zero down mortgage allows a person to go through the home-buying process without a down payment.

Most people interested in buying homes need loans to make it happen. One common requirement for a loan is a down payment. This is a percentage of the sale price which needs to be paid beforehand. The percentage required can vary greatly and can be as high as 20 percent. There are, however, certain instances when low down payments are accepted. Then there are instances of zero down mortgages where a loan is issued with no down payment.

At one time, the number of zero down mortgages was on the rise although that no longer is the case. Some lenders do not offer the option at all. For a person to be considered for a zero down mortgage, she generally needs a high credit score. Those who qualify for veterans loans can often qualify for a zero down mortgage easier than other people.

There is a reason for the difficulty. A down payment generally acts as a measure of security for the lender. Without a down payment a lender can become exposed to substantial risk. This risk has materialized in the past and caused a great deal of financial problems for lenders.

For this reason, a person who does manage to get a zero down mortgage will also need private mortgage insurance. This is coverage that offers a lender protection when a person defaults on loan payments. People are often advised to consider the amount of this coverage when considering a zero down mortgage. In some cases, it can substantially add to the price of the mortgage, although it does not add equity into the property.

People are often advised to carefully consider a zero down mortgage, even if they have the option offered to them. Such mortgages have been heavily linked to increased chances of foreclosure. One reason for this is because people often seek zero down mortgages because they do not have the money for a down payment. This can be a signal that a person is not in a healthy financial position to purchase a home.

Another reason that people are advised to strongly consider this type of mortgage is due to the expense. A person with a zero down mortgage will generally pay more per month for her house than one who does not. This often results in stressed finances since a larger portion of income must be devoted to mortgage payments.