The “80/20 Zero Down” Mortgage Program
By Jon Dougherty
The most popular method of financing home purchases in the Auburn-Opelika-Lee County area is “zero down” financing, according to the banks and mortgage lenders in our area. This is not done by asking the seller to hold a large second mortgage or any other type of “creative” real estate seminar technique. This popular mortgage program is available from every bank and lender we contacted in our area.
Surprisingly, the lenders offer more than one type of “zero down” mortgage financing.
They are keenly aware that they are competing for your business and that is reflected in the flexibility of the mortgage programs available to you today.
Far and away, the majority of purchasers using “zero down” mortgage financing from a bank or mortgage lender choose the “80/20 Zero Down” program.
What is it?
The 80/20 “zero down” program is basically two loans. There is a first mortgage loan of 80% of the purchase price and the remaining 20% is either a second mortgage or home equity line of credit. Both loans are made simultaneously at closing so the seller gets paid 100% of the contract price. Once you know that you are approved for this program you can act and make offers as if you are a cash buyer. In essence, you are since you will be making offers that give the seller all cash at closing with no down payment from you.
The 80%
The first mortgage will be for 80% of the purchase price. While most buyers choose a traditional 30-year, fixed-rate mortgage, you could choose a variety of products like an ARM (adjustable rate mortgage) or interest-only mortgage to help reduce your monthly payments. By keeping the loan-to-value (LTV) of the first mortgage at 80% or less, you avoid having to purchase private mortgage insurance (PMI) and thus keep your payments even lower.
The 20%
Although there are many choices for the second mortgage, the most popular ones are a home equity loan or an interest-only loan. Many times a home equity loan, like a line of credit, can be done with little to no closing costs. Although, an interest-only loan will reduce your monthly payment, you will not be paying down the principal.
Advantages
Simple. Almost all banks and mortgage lenders now offer this one hundred percent program. Competition for your business has made qualifying for the program relatively easy and rates are very low. In our area there are lenders who will accept credit scores as low as 620. Of course this depends upon your other qualifications like your income and time on your job.
The other main advantage is that you avoid any monthly PMI charges.
Many times, buyers know that they will have a future income that will allow them to pay off the 20% mortgage in just a few years. When this happens, they are left with an 80% ?rst mortgage at a low rate.
Disadvantages
While this is the most popular “zero down” financing program, it is not the only one. Lenders also offer straight 100% financing with a first mortgage only. You will have to pay monthly PMI charges, but sometimes the rate for one mortgage is lower then the “blended rate” for the two mortgages of the 80/20 program. Also, PMI is not required once the value of your house equals 78% of the loan. Once that happens, due to a combination of paying down the principal and the growing value of your house, PMI payments will “drop off” the mortgage payment.
Is 80/20 Program for You?
It certainly can be. As with all financial products it all depends on what works best for you given your circumstances and the house you are purchasing. Before you go house hunting, and a great mortgage lender and learn your options.
We welcome your comments, questions and suggestions.
Send them to Jon Dougherty
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