What You Need to Know About No-Down-Payment Mortgages

By Nathan Hamilton Markets Fool.com

With the median new home price reaching $296,200in February, it's unlikely the majority of Americans can come up with the standard 20% down payment required by many traditional banks. That's why low- and no-down-payment mortgages have become popular, making homeownership affordable for more Americans.

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In the video segment below, The Motley Fool analysts Kristine Harjes and Nathan Hamilton discuss a few essentials homebuyers need to know about no-down-payment mortgages, including where to find them and the associated costs.

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Kristine Harjes: One of the biggest struggles in getting a mortgage is deciding how much you want to pay as part of your down payment. There are plenty of people out there that might be tempted to get a zero down payment mortgage, which is an option that is out there, and because of that we want to give you all the information we can about what exactly it means to get a no down payment mortgage and what you need to know before doing so.

Nathan Hamilton: Yeah, we'll go through no down payment mortgage 101 just in a brief video here. Essentially you've got to categorize it in two different ways. You've got military-related and non-military-related, and there are some options for each one. Military specifically, you can go through the VA or Navy Federal Credit Union. If you're going through VA, as with any sort of mortgage deal, any deal you ever find there's always a caveat.

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What you're going to see is a somewhat high up-front fee for originating the mortgage, which generally if you look at it, is going to range from 1.25% to 3.3%. If you compare that to Navy Federal Credit Union, it's a standard 1.75% up-front fee. This is one time. It's not ongoing.

Harjes: What about non-military-related?

Hamilton: Yup, so if you are not a military member there are USDA loans, which is US Department of Agriculture, and they do offer mortgage loans with no down payment, zero dollar down payment. There are some certain qualifications and occasional requirements like generally if you live in a big city you're not going to qualify for them, but you can look online at the USDA. They actually have maps of what areas of the country, you can plug in your zip code, put in some of your basic details, and it will tell you if you are indeed eligible.

Now with USDA loans, one thing to point out, there's a 1% up-front fee, which is low, but there's also a 0.35% ongoing fee. That's every year of the mortgage value.

Harjes: That's on top of other interest payments that you might be making?

Hamilton: Yup, absolutely.

Harjes: Okay, so it definitely seems like it would be worth knowing about these fees and in particular knowing the difference between the up-front fee and the ongoing fee.

Hamilton: Yeah, because if you look at it, it's almost like private mortgage insurance, which if you put down less than 20% on a loan through, say, a bank or a traditional lender, they're going to lob a fee at you that you pay each month. It's about half a percent to 1 percentage point. This is very similar. It's not called the same sort of thing, but you pay that every year, and it does amount to pretty significant, maybe hundreds of dollars on top of your regular mortgage payment every month for the entirety of that loan.

Harjes: For anybody looking at a mortgage and considering no down payment, it's very important that you run some numbers and see is this really the best strategy for me to pay a little bit more ongoing for the duration of the mortgage as opposed to holding off for a little bit and trying to build up more of a down payment.

Hamilton: Yeah, absolutely.

Harjes: If you're looking for more helpful tips like these about getting a mortgage or increasing your credit score, check out Fool.com/mortgages, where you can find a bunch of calculators and other helpful tools, and you can also get access to highly rated lenders with low rates, and you can even get our free guide, "5 Tips To Increase Your Credit Score Over 800."

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