Can I roll the down payment into my mortgage?

Prospective homebuyers with little cash on hand often ask, “Can I roll the down payment in to my mortgage?” The answer is “Yes, but...” In doing this, you aren't really rolling your down payment into the mortgage - you're just not making a down payment at all. This type of loan has a number of repercussions, the most critical being:

High Bar to Qualify

In the post-subprime mortgage crisis environment, hardly any lender is giving out no down payment mortgages. The only true prime no down payment mortgage that exists is the VA loan, which is only available to veterans. Besides that, you won't find a reputable or sustainable lender who is going to give you a 100% loan-to-value mortgage unless you can prove excellent creditworthiness and substantial savings or assets.

If you're looking for a no down payment mortgage because you are cash strapped, then forget about it. All the lenders who gave out loans like that have long since gone out of business.

Higher Interest Rates

No down payment mortgages are risky business, and lenders make borrowers pay for it. As a rule, mortgages with higher principals and lower down payments come with higher interest rates. Furthermore, you'll have to purchase private mortgage insurance (PMI), which adds to your monthly mortgage payment without building equity.

Non-Conforming Loans

No down payment loans, other than VA loans, are almost always non-conforming. That is, they don't the standards set out by Fannie Mae or Freddie Mac and can't be sold to a government sponsored enterprise on the secondary mortgage market. That means more risk for the lender and higher costs for you.

Other Considerations

Perhaps a better idea is to consider rolling the closing costs into your mortgage. This can be done either with a seller assist, where the seller pays part of your closing costs (perhaps in exchange for a higher sale price), or by having the broker pay for part of your closing costs out of his or her yield spread premium. A yield spread premium is a commission that the broker receives from a lender in exchange for locking in a higher interest rate than you would usually qualify for. So, in this way, you do end up paying more in the long run.

No matter what you do, take time to calculate your break-even point. That is, at what point do you start paying more than if you would've just made a down payment upfront. You may be surprised at how soon this actually is. It may be in your best interest to save up for a few months to make a suitable down payment.

All that being said, if you do have a large amount of capital and/or expect to come into an increase in income in the next few months or years, a no down payment mortgage might make sense for you. For investment properties or fixer uppers, a no down payment mortgage can go from 100% LTV to a significant amount of equity very quickly. Make sure that you have a sound financial strategy in place before pursuing any type of non-traditional mortgage.