Below are 9 different types of zero down mortgage that you can qualify for. Each one has positive and negative aspects. Read and learn about which zero down mortgage will suit you best. 80/20: The 80/20 loan is simply an 80% first mortgage with a 20% second mortgage for a total of 100% financing. In other words you are getting two loans. This is most common no down mortgage.
The positive aspect of this loan for a subpime borrower is that interest is typically much lower than a 100% one loan.
This zero down mortgage is a beneficial loan for conforming borrowers because it will help you avoid mortgage insurance. Mortgage insurance is an insurance policy that you pay and that is of no benefit to you. It simply protects lender in case of default/foreclosure. Sub-prime loans almost never have mortgage insurance, but be sure to ask.
The negative side of this loan is that you will pay two different sets of closing costs, which could tack on an extra couple of thousand dollars.
Also many people are afraid of having to make two different payments. Have no fear. You are more or less paying same amount as if it was one loan and typically they are due at same time.
One final thing to think about is that second mortgage interest rate will almost always be significantly higher than first mortgages interest rate.
The seller can typically pay 3% of purchase price of home towards closing costs with a conforming loan. With a sub-prime loan seller can typically pay 6% of purchase price towards closing costs.
100% One Loan: This type of zero down mortgage is pretty straight forward. It is simply one loan for 100% financing of purchase price.
Unfortunately sub-prime borrowers will typically pay a much higher interest rate than they would with 80/20 home loan.
For conforming borrowers down side is that you will pay mortgage insurance which can range from .55% to 1.94% of loan amount. The benefit for conforming borrowers is that interest rate will be lower over all since you will not have a second mortgage. Plus once you have 20% equity in home you can get mortgage insurance taken off.
The seller can typically pay 3% of purchase price of home towards closing costs with a conforming loan. With a sub-prime loan seller can typically pay 6% of purchase price towards closing costs.
2/28 or 3/27: This loan is a very common zero down mortgage for sub-prime borrowers but conforming borrowers can take advantage of this loan as well. This loan is an Adjustable Rate Mortgage also known as an ARM. What this means is that loan’s interest rate is fixed for first 2 to 3 years of loan, and then is fully adjustable for remaining years of loan.
These loans have caps, meaning they can only fluctuate a fixed percentage per adjustment and have a max in percentage that they can rise for life of loan.
A quick example of this would be as follows. Lets say you have a 2/28 loan and interest rate is 7% with caps of 3% and 6%. So with first cap being 3% it can only rise a maximum amount of 3% per adjustment. The second cap of 6% is that interest rate can only rise by a maximum of 6% for entire life of loan. So worse case scenario is that your interest rate would rise from 7% to 13%. But remember it can also fall as well.
I refer to these types of zero down mortgage as band-aid loans. It gets you into a house and at end of 2 or 3 year period you can refinance. Hopefully at this time you are now a conforming borrower and you will qualify for a fixed home loan at a lower interest rate.
The seller can typically pay 3% of purchase price of home towards closing costs with a conforming loan. With a sub-prime loan seller can typically pay 6% of purchase price towards closing costs.
VA Loan: The VA is 100% financing and has no mortgage insurance. Unfortunately you will need to be a veteran to qualify for this zero down mortgage.