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Zero down loans
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January 24, 2001: 8:20 a.m. ET
FHA, VA, and Fannie Mae offer home buyers loans with no downpayment
By Staff Writer Shelly K. Schwartz
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NEW YORK (CNNfn) - Buying a home: It's one of the best investments you can make. It helps reduce your tax burden, allows you to build up equity and, over the years, the property you purchase can appreciate significantly in value.
Yet, the dream of homeownership remains just that for millions of Americans -- a dream.
"For people who don't have savings, including young families just starting out, but really for anyone who hasn't been able to save, (the paycheck-to-paycheck lifestyle) is a hard thing to break out of," said Alfred King, a spokesman for Fannie Mae.
The biggest hurdle facing would-be homeowners, he notes, is coming up with the cash for a downpayment, which can total into the tens of thousands of dollars.
Mortgage lenders require borrowers to put a full 20 percent down on the price of their home to avoid paying private mortgage insurance, for example. On a $200,000 house – that's $40,000.
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"Almost anyone can become a homeowner today. So, don't feel that you have to rush into the first deal you're offered. Consider all of the factors."
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N'ann Harp, Smart Consumer Services |
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You can land a loan with less money down, of course, but you can also expect to pay a slightly higher interest rate.
Add to that the closing costs they'll be forced to cough up, usually a few thousand dollars more, and many consumer start to view homeownership as an unattainable goal.
If you're among them, however, experts say there are lots of ways to get in the game with little or no money down -- even if your credit report is tarnished. And with interest rates hovering at around 7 percent, resulting in lower monthly payments, they say there's no time like the present to shop around.
"The lowest you could put down used to be 5 percent, and then it was 3 percent, but now it's zero," said Allan Domb, president of Allan Domb Real Estate in Philadelphia, which provides real estate and lending services. "Today, you can get a loan with no money down."
(Click here for a tool that tells you whether it's wise for you to rent or buy.)
A safer haven?
Real estate this year is back in favor among the average investor.
It's easy to see why. Over the last 5 years, home values nationally have risen 29 percent, with the average home price appreciating 7 percent since the fall of 1999 alone, according to data from Freddie Mac and Fannie Mae.
That compares with the painful performance on Wall Street, where the S&P 500 index last year lost more than 10 percent and the Nasdaq composite index fell 39 percent.
"The thing holding the real estate market together right now is that I can tell buyers they'll likely enjoy about a 7 percent to 8 percent return on their investment," Domb said. "If I told buyers that last year the next thing I'd hear was a dial tone. People are starting to realize that there's no easy way to make money. The real estate market is real. You won't make a killing, but you'll do well."
Exploring your options
If you've heard enough and you're ready to buy, insiders say you should begin by investigating any federal and state loan programs for which you may qualify.
For example, the Federal Housing Administration, or FHA, offers loans for low-to-moderate-income families. FHA loans have low downpayments, typically around 3 percent and they boast relatively easy qualifying requirements, said N'ann Harp, president of Smart Consumer Services, a consumer advocacy group in Crystal City, Va.
Unlike other loan programs, FHA mortgages have no income restrictions and the agency will consider approving loans for borrowers with a lower credit score. Past bankruptcies do not necessarily bump borrowers out of contention.
"Bear in mind that you'll have to pay slightly higher mortgage insurance premiums for FHA (loans)," Harp said. "But, the good news is that FHA recently lowered these premiums."
Likewise, the Department of Veterans Affairs offers it's own zero-down mortgage program to the more than 29 million veterans and service personnel in the U.S. military.
(Click here for more on the VA loan.)
The program puts a cap on closing costs and eliminates the requirement that you purchase private mortgage insurance, which will shave down your monthly payment. Even the 2 percent loan funding fee -- from which certain vets are exempt -- may be paid in cash or rolled into the loan, Harp said.
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 LOAN PROGRAMS
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- Federal Housing Administration
- Veteran's Administration
- Fannie Mae
- Conventional lenders
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VA loans generally can not exceed $203,000, but they can be used for the purchase of an existing home, the construction of a new home, or to buy an older home and fix it up.
At the same time, Harp said many states and local jurisdictions have created a variety of incentives and low-cost mortgage loans on their own, in an effort to boost home ownership rates.
In San Francisco, one of the nation's most expensive cities in which to live, Harp said the city helps make up the difference between your savings and any required downpayment. Your available cash becomes the downpayment and the city's contribution becomes the second mortgage.
She also said Florida is among the states offering access to downpayment and closing cost assistance through a partnership between Fannie Mae and the state housing finance corporation.
"To find out what kinds of low- or no-downpayment loans are available, contact your state and local housing agencies," Harp suggested, adding that your local real estate agent, mortgage broker and credit union should also be able to help.
She added: "Choosing the best loan for your particular situation is a decision you'll want to feel comfortable with for many years in order to make the most of what may well be the investment of a lifetime."
Conventional loans
If none of those programs fit your needs, it may be time for Fannie Mae. The federally chartered mortgage lender, charged with helping to increase homeownership rates in the U.S., began offering a new zero down loan program last spring for borrowers in good credit standing.
There are no income restrictions, said King, but the maximum purchase price of homes that are eligible for the "Flexible 100" loan cannot exceed $275,000. The program does allow for a higher than average debt-to-income ratio than most conventional loans offered by private banks, but it also requires borrowers to hold good to excellent credit ratings based on FICO scores.
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"There are lots of city and county governments that have various types of housing grants. Even nonprofit groups, churches and employers will sometimes provide assistance."
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Alfred King, Fannie Mae |
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King notes that borrowers who take advantage of the loan must contribute up to 3 percent of the purchase price of the home. That funds can be applied to closing costs, escrow fees or the downpayment itself, if desired. But the good news is that the money can come from a family member or friend, or from grant money allocated to the borrower through a city or state program.
"There are lots of city and county governments that have various types of housing grants," King said. "Even nonprofit groups, churches and employers will sometimes provide assistance."
Not all lenders have been approved to offer the Flexible 100 loan. As such, it's a good idea to call Fannie Mae at 800-732-6643 to find out which lender near you offers the program.
Lastly, private lenders across the country also offer zero down mortgages. Among them: the Chicago Home Mortgage Corp. in Chicago; Nations Home Funding in Washington, DC and Phoenix and the Olympic Loan Center in Sherman Oaks, Calif.
"Not all lenders are willing to make a loan to someone who doesn't have money for a downpayment because it's a bigger risk," said Steve Hopkins, a home loan specialist with Nations Home Funding in the Virginia, Washington, DC and Maryland region. "Those that do generally charge about a half a point to a full percentage point higher in interest rate price for borrowers."
He notes many of the borrowers seeking loans in his office actually do have money for a downpayment sitting in the bank. "They just feel their money is better placed somewhere else in the market," he said.
Whatever your situation, there are lots of ways to turn that dream of homeownership into a reality. All it takes is some careful shopping and an investigative spirit.
"Almost anyone can become a homeowner today," said Harp, president of Smart Consumer Services. "So, don't feel that you have to rush into the first deal you're offered. Consider all of the factors. Ask questions and take your time." 
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