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Is the Zero-Down Mortgage a Thing of the Past?

Just a few short years ago, lenders were more than willing to approve mortgage loans to buyers with little to no down payment. The zero-down mortgage was all the rage. Essentially, if you had good credit and met the income requirements, you could buy a house without putting a cent down up front. Abruptly, though, the housing crisis brought that trend to a screeching halt. Now the 0% down payment is all but unheard of, and some borrowers might even have trouble qualifying with as much as a 10% down payment. Read on for more about the death of the 0% down payment and what alternatives remain available to prospective homebuyers.

Lender Risk & Loss

The extinction of the zero-down mortgage has to do with the hemorrhagic losses lenders experienced at the height of the housing crisis. Foreclosure rates exploded while home values plummeted, and the combination proved lethal for mortgage lenders. Today, lenders have tried to compensate for their past missteps by minimizing the risk they take with new mortgages. Ratcheting up the minimum required down payment is one way to reduce the stakes of mortgage lending in an uncertain climate.

Other Options

A 0% down payment might not be possible anymore, but borrowers may still be able to get away with very low down payments with some lenders. Here are two such options:

  • The 3.5% down payment. If a homebuyer can come up with only 3.5% of the purchase price of a home, he/she has one borrowing option: a Federal Housing Administration (FHA) loan. The disadvantages of these loans include relatively high rates, credit sensitivity, and mandatory mortgage insurance.
  • The 10% down payment. Getting together a 10% down payment opens up many more borrowing options. More lenders will compete for your business, which will reduce fees and interest rates. Additionally, you will begin your mortgage with a decent amount of equity.

Making 20% Happen

Unquestionably, it’s more difficult to buy a house these days with a down payment of less than 20%. However, the 20% down payment is not necessarily unobtainable. Consider tapping these sources to come up with a 20% down payment and avoid mortgage insurance:

  • Savings. There are very few reasons to rush into buying a house right now; home prices will continue to fall for a while longer, and rates aren’t on the verge of exploding. In other words, you have time to save. Take a year or two to save toward a substantial down payment.

  • Sell stock and assets. Try selling non-retirement stocks for the cash for a down payment or think about selling extra assets, like your second vehicle.
  • Borrow from your retirement account. This is a risky option, but you can borrow from your 401(k) account for down payment money. Just make sure you have a stable job and repay yourself with interest.
National Rate Averages

Mortgage Rates

Product Rate
5/1 yr ARM 3.147%
1 yr ARM 3.299%
15 yr fixed 3.221%
30 yr fixed 3.815%

Home Equity Rates

* Updated Jun 7, 2012