Slim Pickings for Buyers Without Cash for a Down Payment

M ortgage loans that allowed you to buy without a down payment were a fast ticket to homeownership for many first-time buyers over the past decade.

Thousands chose a 100 percent mortgage to grab their piece of the American dream, neatly sidestepping the single biggest obstacle to homeownership: cash for a down payment.

Too bad the credit crunch has almost completely wiped zero-down mortgages off the table.

According to several mortgage brokers and bankers, there is only one 100 percent loan program that is generally available: a VA loan, backed by the full faith and credit of the federal government through the Department of Veterans Affairs.

But VA loans are available only to people, or their spouses, who have met minimum service requirements. And VA loans are expensive, especially if you don't have any cash for the down payment. The VA requires borrowers to pay a funding fee of 2.15 percent for regular military veterans who are using their entitlement for the first time. If you put down 5 to 10 percent, the funding fee drops to 1.5 percent. If you put down 10 percent in cash or more on your purchase, the funding fee drops again, to 1.25 percent.

For a subsequent purchase, the funding fee rises to 3.3 percent if you don't have any cash to put down on the property. Similar funding fees are charged for cash-out refinances.

Of course, if you had 3.3 percent to pay as a funding fee, you'd probably look for a different loan.

Over at the Federal Housing Administration, you can't get true 100 percent financing, but you can get pretty darn close.

The FHA allows borrowers to get a loan for 97 percent of the purchase price. You are allowed to receive the 3 percent cash as a gift from a family member or relative or a nonprofit organization.

Although the Department of Housing and Urban Development recently tried to ban third-party nonprofit organizations from providing down-payment cash if the organizations receive funds that are generated from the transaction (like funds paid by the sellers), the ruling was set aside by a judge's order.

In the case of Nehemiah Corp. of America, the nonprofit organization that fought the ruling, the group would put up the 3 percent down payment required by FHA loans, and after the transaction closed, the seller would give somewhat more than 3 percent of the sales price back to Nehemiah to replenish its funds.

The bottom line for borrowers in this arrangement was a mortgage loan that required no down payment.