- Some lenders let you buy a home without a down payment.
- This can mean more costs in the form of higher interest and insurance.
- It could also make it harder to sell or refinance down the road.
If you're thinking about buying a house without a down payment, you may want to reconsider.
Traditionally, buying a home meant making a 20% down payment. However, a growing number of people opt to put down much less because it can be difficult to save such a large amount -- especially in housing markets where the price of properties has soared.
Mortgage lenders have become more willing to offer mortgages without requiring anywhere close to 20% down. And in fact, it's possible for some borrowers to put no money down at all and still get approved for a home loan.
But if you're considering this approach, think carefully about these four big reasons why buying a home without a down payment is often a bad idea.
1. Fewer lenders may be willing to give you a loan
If you're looking for a mortgage that requires no money down, you'll have a narrower pool of lenders to choose from.
USDA loans and VA loans are often available without a down payment. And some lenders have special programs to allow you to get a conventional loan with no money down. But the majority of lenders do want you to put at least some money at stake.
If you narrow down your list of potential lenders to only those that don't require a down payment, you won't have as many choices when shopping around for rate quotes. And this could mean getting stuck with a lender that charges excess fees or offers other unfavorable terms.
2. Your interest rates will be higher
When you don't make a down payment, you have less skin in the game. Generally, lenders will view you as being a higher risk since only the financial institution making the loan has money at stake. As a result, you're likely to be offered a loan at a higher interest rate than you would have been offered if you'd made a large down payment.
3. You'll need to pay for mortgage insurance
In most cases, except for VA loans, you will have to pay for mortgage insurance if you make no down payment or a very small one. This adds to your housing costs, but it protects only the lender from losses -- not you.
If you stop making mortgage payments, mortgage insurance doesn't step in to protect you against foreclosure. Instead, it makes sure the lender doesn't have uncompensated losses if it has to take your house and can't sell it for what you owe.
Mortgage insurance can be expensive, so you'll want to avoid it by making a 20% down payment if you can.
4. You could end up owing more than you could sell your house for
If you don't make a down payment, then you'll owe the entire amount you paid for the house. The problem is, if you must sell the house, you would likely have to pay a real estate agent's commission and other fees that add up to several thousand dollars. As a result, you may not be able to make back all of what you paid for the house, and that could leave you trapped unless you can bring money to the table.
It can take a long time to build equity when you've taken out a loan without a down payment. So for a long time after your purchase, you may be underwater, or owe more than your house could be sold for. If you need to refinance or sell, that's a huge problem.
Buying a home is a huge milestone, and one worth celebrating. You don't want to find yourself coping with any of these downsides during that exciting time, so, if possible, aim to wait to buy a house until you have some money saved up. And, if you can, wait until you have a 20% down payment so you can get the best rates and have the widest choice of lenders. This should make your loan less expensive, and less risky, over time.
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