'Zero down' mortgage can jump down-payment hurdle

"Zero down" mortgages are making it easier for some people to buy a new home

March 26, 1998
Web posted at: 5:41 p.m. EST (2241 GMT)

From Detroit Bureau Chief Ed Garsten

DETROIT (CNN) -- Sometimes the hardest part about buying a new home is not making the payments -- it's finding the cash for a down payment and closing costs.

But now, some banks around the nation are eliminating that hurdle for qualified home buyers, though not without a price.

"There's a good portion of the population who every month is able to make monthly rent payments but is unable to save enough for the down payment," says Mark Hammond, president of Flagstar Bank, which offers so-called "zero down" mortgages. "That rent payment can equate often to a nice home payment."

However, zero-down loans aren't available to everyone. Flagstar, for instance, requires that a borrower's monthly income not exceed 115 percent of the median income in the area where they're buying the home. Lenders may also require that a home buyer not sell or refinance a house for two to three years.

And many banks charge two to three percentage points higher than prevailing interest rates for these special mortgages. And that can add substantially to a monthly house payment.

For instance, on a $100,000 house, adding two percentage points to the current mortgage lending rate of about 7.5 percent will add $170 to $200 to the monthly payment.

Another drawback for homeowners who don't pay any up-front costs is that they "don't have any equity in the property," says William Steele of the Mortgage Marketing Information Service.

"So if you have to move within a year or two, you could find yourself in somewhat of a bind," he says.

Still, though, for cash-strapped home buyers wanting to make the switch from being renters, a "zero down" mortgage can give them new options.

Related sites:

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• Flagstar Bank
• Mortgage Market Information Services, Inc.

External sites are not endorsed by CNN Interactive.

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