When buying property, such as a home or car, the buyer commonly pays some money down when financing the purchase with a loan. In some cases, the lender providers 100 percent of the funds required for purchase, known as 100 percent financing or a no money down purchase.
While some conventional lenders offer 100 percent financing in certain instances, you more typically get this opportunity through government-backed programs such as the Veteran's Authority or Department of Agriculture loan programs. The FHA also offers loans with rates as low as 3.5 percent for people who can't afford a large down payment and who may have credit challenges through conventional lending channels.
These types of government programs mandate that the home buyer pay for mortgage insurance, which protects the lender when buyers default on its loans. This reduced risk motivates lenders to offer such generous financing. Conventional lenders sometimes offer low or no money down offers, but require buyers to carry private mortgage insurance to offset the risk.
A buyer normally needs an excellent credit rating to get no money down car loans without paying interest on the money borrowed. Others qualify for low interest rates that make it tempting to finance the entire purchase.
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Some go to a bank or credit union prior to purchasing a vehicle, and get preapproved for financing up to a specified amount. If the buyer stays within this limit, the loan is 100 percent financed. Lenders also may limit no money down loans or charge higher rates on new vehicles because of the rapid depreciation upfront.
Pros and Cons
Even when you gain access to 100 percent financing options, they aren't always the best financial move. If you have cash, putting some money down on a home or car reduces your monthly payments and saves you on interest over time. With a home, paying the traditional 20 percent down means you avoid mortgage insurance, get favorable loan rates and realize lower home payments.
However, with a very low or no interest rate, preserving your cash and going the 100 percent financing route is sensible. You may be able to invest the money you would have spent on a down payment elsewhere and generate returns that exceed the amount of interest you're paying, particularly if you qualify for 0 percent financing.