Zero-down mortgages: What to know about this path to homeownership

In a nutshell

Zero-down mortgage programs could be a path to homeownership for first-time buyers, but they also carry potential risks you should consider before applying.

• United Wholesale Mortgage recently announced a new mortgage program that offers 0% down payments for qualified borrowers.
• The lending giant's program requires taking out a second lien loan, which must be paid in full by the end of the loan term or when the first mortgage is paid off.
• Other mortgage options, including government-backed loans, require little to no down payment.

What is a zero-down mortgage?

A zero-down mortgage is a home loan that does not require a down payment to secure.

Traditionally, 20% was considered the standard for a down payment on a house. That isn't necessarily the case now, as requirements and preferences vary between lenders. These days, you can put down as little as $0 in some cases, although lenders typically require you to pay Private Mortgage Insurance (PMI) monthly until you build up 20% equity in your home.

Homebuyers generally put down anywhere from 3% to 20% of the home purchase price, but some lenders and programs offer options for lower down payments.

How do they work?

With a zero-down mortgage, borrowers receive a mortgage to purchase a home that does not require an upfront payment at the time of purchase. Saving for a down payment is a significant obstacle for many potential homebuyers. Zero-down mortgage plans offer a solution that could shorten the timeline for individuals and families who want to own a home.

In May 2024, United Wholesale Mortgage (UWM), one of the largest mortgage lenders in America, launched its 0% Down Purchase program. While it's not the first zero-down mortgage program to exist, the move marks a change in how lenders and banks approach mortgage lending.

UWM's zero-down mortgage program comes with some requirements and some risks. To start, you must be a first-time homebuyer or have an income that is at or below 80% of the area’s median income. Qualifying borrowers who are approved for the program actually receive two loans:

• First lien mortgage: A home mortgage for 97% of the home purchase price.
• Second lien mortgage: 3% of the purchase price, up to $15,000.

The first loan is a traditional fixed-rate mortgage loan. The second loan has no monthly payment requirements and doesn't charge interest. However, there is one caveat that could be troublesome for some borrowers — the second lien mortgage must be completely paid in full when the first mortgage is paid off or if you want to refinance your mortgage.

There are other zero-down mortgage programs, each with its own set of guidelines and restrictions. Some zero-down mortgages, like VA loans and USDA loans, are backed by the federal government and typically have more lenient borrower requirements.

What are the risks of no down payment mortgages?

Without a down payment to worry about, qualified borrowers can bypass the initial cost and fast-track their way to homeownership. However, there are considerable risks to consider for those who take a mortgage without a down payment.

• No home equity: No down payment means homebuyers start without any home equity. You could end up with an “underwater mortgage” or negative equity if your home value decreases and you owe more than it's worth. You're also left more vulnerable if you experience hardship, such as job loss or if there's an economic downturn.
• Limited options: Another drawback to having less equity is that your options are limited if interest rates drop. You could be stuck with a higher rate instead of refinancing to a lower rate.
• Higher payments: Your mortgage loan ends up costing more without a down payment, and so do your monthly payments.
• Balloon payment: You could end up with a large lump sum payment on the second mortgage loan if you want to sell your house or refinance your mortgage, especially if you haven't been making payments on it. If not, your home could end up in foreclosure.

How is this different from the 2008 subprime crisis?

While there are considerable risks with zero-down mortgages, there are notable differences between the current lending environment and the 2008 subprime crisis. The 2008 subprime mortgage crisis was a financial disaster caused by banks issuing high-risk loans to borrowers with poor credit. These subprime mortgages often had low initial interest rates that later spiked, making repayment unaffordable for many borrowers.

Also, banks bundled these risky loans into mortgage-backed securities and sold them to investors, spreading the risk globally. When homeowners began defaulting on their loans, the value of these securities plummeted, leading to massive losses for financial institutions. This triggered a global economic downturn, resulting in widespread foreclosures, bank failures and the Great Recession.

Following the financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted. The comprehensive legislation introduced significant changes to lending practices in the U.S., including stricter underwriting standards, enhanced capital requirements for banks and the Qualified Mortgage rule, which is used to verify a borrower's ability to repay loans.

Another positive of the Dodd-Frank Act was the creation of the Consumer Financial Protection Bureau (CFPB) to oversee and enforce consumer protection laws, ensuring fair treatment and transparency for consumers.

Additionally, risk retention rules were implemented to ensure lenders retained a portion of the credit risk on securitized loans. Having these rules in place promotes responsible lending practices since lenders are directly impacted by the loans they issue to borrowers.

The measures taken by the government have created an environment of improved consumer protections and lending practices. The hope is that they will help prevent a recurrence of the financial instability experienced during the subprime mortgage crisis​.

Alternatives to no down payment mortgages

Zero-down mortgages offer some benefits but may not be the best option for many potential homebuyers. Below are alternative mortgage loans to consider that have low or no down payment requirements for qualified borrowers.

VA Loans

VA loans are mortgage loans backed by the U.S. Department of Veterans Affairs. They are available to veterans, active-duty service members and some surviving spouses. These loans require no down payment and do not require PMI, but they do come with a funding fee.

USDA Loans

U.S. Department of Agriculture (USDA) loans are for qualified rural and suburban homebuyers. They offer no down payment options and are aimed at low- to moderate-income borrowers in eligible areas.

FHA Loans

Federal Housing Administration (FHA) loans require as little as 3.5% down and are available to borrowers with lower credit scores. These government-insured loans are designed to make homeownership more accessible.

Conventional Loans

Some conventional mortgage loans offer down payments as low as 3%. These often require private mortgage insurance (PMI) until the loan-to-value (LTV) ratio reaches 80%.

The AP Buyline roundup

Zero-down mortgages may shorten your home buying timeline, but there are risks to consider before making a decision. The upfront benefits may not be worth it in the long run. Consider your financial situation and long-term goals for homeownership. Research lenders and lending options to find ones that you qualify for and would fit your needs. Read the fine print so you understand any guidelines or stipulations attached to the mortgage loan, as well as any fee requirements.

Frequently asked questions (FAQs)

What credit score is needed for a zero-down mortgage?

Credit score requirements and other underwriting standards vary between lenders and mortgage programs. United Wholesale Mortgage requires a FICO score of 620 for its 0% Down Purchase loans. Some government-backed loans, like VA loans, have no credit score requirement, but lenders often prefer borrowers to have a score of at least 620 unless there is a large down payment. FHA loans require at least a 500 credit score, but you may need a higher score depending on the lender.

Which type of mortgage does not require a down payment?

Zero-down mortgage programs offer loans without down payment requirements. Some private lenders and banks offer no down payment loans for qualified borrowers. Government-backed mortgages, like VA loans and USDA loans, do not require a down payment.