What Is a No Down Payment Mortgage?

The average down payment for a house 20 years ago was 20 percent. Today, it's common for people to put as little as five percent down on their new home. Simply put, a "no down payment mortgage" is a mortgage for which you don't put any money down on the purchase of your house. Many lenders are now offering such loan programs.

These programs are also referred to as zero-down or no money down home loans. It means you are financing 100 percent of the value of the home. Lenders introduced this type of loan because property values have historically risen, which helps homeowners create equity in their home. No down payment mortgages or low down payment mortgage can be a little more difficult for lenders, but they are now better able to review a client's entire profile which helps ensure they are a safe risk.

Who Is a Good Candidate for a No Money Down Mortgage Loan?

For some people, a no money down home loan may be the only way to buy a home. First-time home buyers may not have enough saved up for a 20 percent down payment or might want to use the money they've saved for other uses like buying furniture or other necessities for their new home. It may be that they have found a home and want to lock into it now before the home appreciates to a point where they can no longer afford it.

By not putting as much money toward a down payment, you can use it for other things such as paying off or consolidating debt. It makes good financial sense because mortgage interest is usually tax-deductible and rates are lower than most credit cards. You may also need that extra money to pay for your children's education.

Avoid Paying Private Mortgage Insurance with No Down Payment

However, the disadvantage to a no down payment mortgage is paying private mortgage insurance, or PMI. Anyone who puts down less than 20 percent of the home's value usually has to pay PMI, depending on the loan program they choose. But there are ways to avoid this:

• Some mortgage lenders are willing to give you what's called a piggyback loan, or an 80/20 mortgage, to avoid PMI. Borrowers get a first mortgage for 80 percent of the value of the home, then a second mortgage (a home equity loan) for the remaining 20 percent, which avoids PMI. Both mortgage interest and PMI may be tax-deductible*.

• Borrowers that meet certain criteria can eliminate PMI after they've reached a predetermined level of equity in their home. This amount varies depending on the type of loan, but it is commonly between 20 percent to 22 percent.

• Lenders are required by law to cancel PMI when the homeowner has reached 22 percent equity in their home if the loan was closed after July 29, 1999. However, once 20 percent equity is reached, the homeowner may make a request to their mortgage lender to cancel PMI. Otherwise, the homeowner may end up paying for PMI during the time it takes to reach 22 percent equity.

• There are other ways to get a 20 percent down payment you may not have thought of. For instance, some loans allow for down payments to come from sources like monetary gifts from relatives or employers. Other ways of coming up with a down payment might include drawing from a trust fund or a retirement account, or using money you inherited. However, be aware that some types of those accounts may incur fees or penalties for making withdrawals.