How zero-down mortgages work
As the name implies, zero-down mortgages require no down payment at closing, but it still doesn’t mean you’re completely off the hook for it. The lender may give you a first mortgage paired with a down-payment assistance loan in the form of a second mortgage, as is the case with United Wholesale Mortgage. You need to qualify based on factors like your credit score, and loans may be meant just for low-income borrowers. VA loan programs and USDA home loans also have specific requirements.
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Explore better ratesBenefits of a zero-down mortgage
A zero-down mortgage could be a good option for you if you can afford the monthly payments that come with a home purchase but have limited down payment funds. This way you can start building equity in a home sooner rather than waiting to save up a down payment.
Also, while it's important for everyone to have money set aside for emergencies, it's particularly crucial for homeowners. When you buy a home, there's a host of things that could potentially go wrong. By not having to make a down payment, you reserve more cash for the unexpected.
Drawbacks of a zero down mortgage
A major problem with a zero-down mortgage is that you start off with no equity whatsoever. This could become a problem if home values fall and you wind up needing to sell.
In that case, you risk falling underwater on your mortgage, which means the amount you owe your lender is more than the amount your home can sell for. It's situations like these that could lead to foreclosure, which could seriously damage your credit for years.
“The aspect of this program that makes me nervous is the silent second mortgage,” Anneliese Lederer, senior policy counsel at the nonprofit Center for Responsible Lending, told MarketWatch. “It’s great that there’s no interest on it, but it’s a balloon payment, and borrowers need to understand what a balloon payment is.”
Also, the less money you put down at closing, the higher your monthly mortgage payments will be. You'll have less money left over to pay your remaining expenses, and you may put yourself at risk of missing mortgage payments due to how expensive they are. That, too, could eventually lead to foreclosure.
Finally, you risk getting stuck with a higher mortgage rate if you put no money down at closing. The average rate on a 30-year loan as of this writing is 6.2%. But since the Federal Reserve is expected to cut interest rates, mortgages may be considerably cheaper in 2025. However, if you sign a zero-down mortgage now, you may not have enough equity or may not be able to pay off that second mortgage to refinance in a year, thereby losing out on a better rate.
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Get StartedAlternatives to a zero-down mortgage
If you can't afford a down payment, there may be options available to you outside of a zero-down mortgage. For one thing, you can look into down payment assistance programs through your state. You could be eligible for VA loan programs and USDA home loans that don't require down payments.
You can also consider multigenerational living if it opens the door to homeownership. Combining resources with your parents or adult children could make it possible to cover a down payment without having to resort to a zero-down program that subjects you to the pitfalls above.
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