The Truth about 0% Down Payment mortgages

by alecoesterreich  - August 12, 2023

Have you ever heard the saying that if something sounds to good to be true that it usually is? Well that is kind of the case with 0% Down Payment mortgage financing aka "Down Payment Assistance". I say "kind of" because it can be beneficial for some people under certain circumstances. Let me explain...

The first thing that you should know is that the bank or lender is in the business of making money, not giving away money. So the money that they lend to you so that you can put 0% Down, comes at a cost.

The way that these 0% Down Payment programs work is that a second mortgage gets combined with an FHA loan. FHA finances 96.5% of the purchase price, leaving the remaining 3.5% to be financed by a 3rd party or the lender. So it's really an FHA loan combined with an additional lender.

When it comes to 0% down, there a multiple programs - not just one. Some are better than others but each one has their caveats and things written in the fine print that you should be aware of.

Here is an example the most popular programs

Chenoa Program
This program requires a minimum of a 660 Credit Score, compared to the normal FHA minimum which is 580. In addition, the Interest rate for the 1st mortgage is on average .5-1% higher than a standard FHA loan and don't forget about the 2nd mortgage because you are financing the 3.5% instead of putting a Down Payment. If you use this program you will have a higher rate on the 1st mortgage and a secondary payment on the second mortgage, this will cause your monthly payment to be significantly higher than if you had just brought in the 3.5% Down Payment.

However, I have seen this program help people that just don't have the down payment but their credit is good and income is high. For these people the monthly payment was not a major concern, it was just a matter of purchasing a home for their family to live in.

Like the Chenoa program you need a starting credit score of 660 for CALHFA. The good thing about this program is that the interest rate is comparable to that of the normal market for FHA loan and the 2nd mortgage is what is called a "silent second" meaning that you will not have a monthly payment for it, but it does accumulate interest, which makes the balance go up and it will have to be paid off if you decide to sell the property or refinance your mortgage.

The major drawback of this mortgage program is that the Debt to income ratio allowed is much lower than the standard FHA loan which means you qualify for a lesser amount. For example if you qualified for 800,000 purchase price with a normal FHA loan, compared to with the CalHFA program you might only qualify for 650,000 purchase price or less.


As much as I would love 0% Down payment mortgages to be as good as the lenders that advertise them claim them to be, they are not. They are a solution for some people in specific situations. They are more of a secondary option for certain people than they are a magic solution for all homebuyers. Build your credit, Save the Down Payment and come in with the 3.5% Down Payment minimum to get the best possible deal.

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