Home values are on the rise and it’s an excellent time to be a buyer. If you think you’re ready to buy a home, but the idea of putting 20% down intimidates you, the USDA zero down mortgage might be something to consider. Mortgage rates across the board are currently inexpensive. This is great for potential homebuyers who want to keep their monthly mortgage payments low. Buying now instead of waiting until next year may save hundreds in monthly house payments. Although the necessity of putting 20% down was a reality in the past, today’s market doesn’t require it. This is due largely to more secure investments and mortgage insurance. The standards for homeownership have put more focus on the buyers’ ability to repay a loan as opposed to just credit worthiness. This ensures homes are being sold to buyers who plan on paying out their mortgages.
There are advantages to making larger down payments: there is often no need for mortgage insurance which saves some on monthly payments and you may get a slightly lower rate, however, most rates are based on the going price of bonds, so there isn’t much variance among loan programs. Saving up for the down payment may be difficult, especially when faced with unexpected expenses like medical treatments and automobile repairs. The option to pay nothing down is perfect for buyers who want to save their reserves for such situations and make sure they are able to budget their monthly mortgage payments in the case of a future financial emergency.
Mortgage insurance is what allows for loan programs to require no down payments. Mortgage insurance is a small fee wrapped into your monthly payment that serves as insurance if you default on your mortgage. This protects the investor and permits them to securely invest in your loan. All loans with less than 20% paid down are required to have mortgage insurance. The USDA zero down mortgage has what they call a “guarantee fee” which serves as a sort of mortgage insurance. Where mortgage insurance is already affordable, the guarantee fee is the lowest available. In fact, the USDA just reviewed its rates in October 2016, and guarantee fees went down. They are now 1.00% up front and .35% annually. The upfront fee is actually financed into the loan so nothing is due from the buyer. The annual fee is also broken down and paid monthly. This saves buyers up to hundreds of dollars a month in insurance versus other low-cost mortgages of the same purchase price.
You should consider making a down payment when evaluating your options, but down payments aren’t necessary in today’s market. Many financially-savvy buyers find that bypassing the upfront down payment gives them the freedom to use their savings for other important expenses, including home renovations and moving costs. The USDA zero down mortgage is great if you either don’t have a substantial savings or don’t want to use it all at once, or if you want a low-cost program with affordable insurance.