When times are tough, and money is tight, there are still some options when you want to buy a house. You may be low on savings, or perhaps you just don’t want to use your hard-earned money on a real estate down payment. Is it possible to buy a home with no down payment? Well, it’s possible, although as we’ll show below, it’s not altogether easy or likely, unless you qualify for a specific type of federally-backed loan.
Zero down payment mortgage
A zero down payment mortgage is exactly how it sounds – a home loan you can get without a down payment. A down payment is the first payment you make toward buying a new home, and it’s due to be paid when you close on your home loan. Lenders will calculate your down payment as a percentage of the total amount you borrow.
As an example, let’s say you buy a home for $300,000, and you have a 20% down payment, that means you’ll bring $60,000 to the loan closing. Mortgage lenders love to get a down payment, especially a significantly large one, because it minimizes the risk that you won’t fulfill your payment requirements every month. Down payments are a big deal for many home buyers, because it can take years to save up that kind of money.
You can only get a mortgage with no down payment if you take out a government-backed loan. Government-backed loans are, again as stated, loans that are backed by the federal government and insured. In other words, the government (not your lender) steps in to pay, if you stop paying your mortgage.
Since this means that government-backed loans are less risky for the lender, the lender can expand their usual criteria to people with riskier financial profiles, such as borrowers with no down payment.
There are currently 3 types of government-backed loans that allow you to buy a home without a down payment: USDA loans, VA loans, and Navy Federal Credit Union loans. Each loan has very specific qualification rules, so not everybody can qualify for them.
If you don’t have an option for a zero down payment loan, you may want to try to get a government-backed FHA loan or a conventional mortgage loan. These options will allow you to make a low down payment.
Zero down payment loans
Here are the 3 zero down payment options below.
United States Department of Agriculture (USDA) loans are backed by the federal government. The government offers this assistance program to encourage development in rural and sometimes also suburban areas. In order to encourage people to move into more rural areas, you can get USDA loans with $0 down. USDA loans also have lower fees than other types of loans.
Both you and your new home must meet a few criteria to qualify for a USDA loan. First, your home must be in a rural or suburban area. In addition, your home can’t be on or part of a working farm, it must also be a single-family unit, and you must live in the home as your primary residence.
You also need to meet a few financial requirements to qualify. The combined gross income in your household cannot be more than 115% of the median income of the county your home is in. Your debt-to-income ratio (a ratio that compares how much you owe each month to how much you earn) shouldn’t be higher than 45%, and you must have a credit score of at least 640.
The US Department of Veterans Affairs (VA) allows active-duty service members, members of the National Guard, veterans or the spouses of deceased veterans to qualify for government-backed VA loans for $0 down also. You get a loan through a private lender, and then the VA guarantees it.
VA loans are backed by the Department of Veterans Affairs and are another option if you want to buy a home with no down payment. VA loans also necessitate that you pay a one-time VA funding fee that’s 2.15% of your loan value, instead of paying mortgage insurance.
In order to qualify for a VA loan, you must meet any one of the following service requirements:
- 90 consecutive days of active service during wartime
- 181 consecutive days of active service during peacetime
- 6 years of service in the National Guard or Reserves
- Be a service member’s spouse that died either in the line of duty or from a service-related disability
- And then in addition to one of the above service requirements, you need a credit score of at least 640.
Navy Federal Credit Union loans
One of the biggest credit unions, Navy Federal Credit Union offers a $0 down mortgage option for military members, military families, and some civilian employees of the US Department of Defense.
You can get a mortgage loan without a down payment from the credit union, but you’ll have to pay a funding fee. However, that funding fee is a flat rate, and might even be lower than the VA loan funding fee, depending on your situation.
Pros and cons of zero down payment loans
- No money down – Clearly a perk to guarantee you can buy a house without any savings. This is of course the obvious advantage.
- Credit score qualifier – Easier to qualify for a mortgage, if your credit score isn’t terrible, and you don’t need to worry as much about trying to make your credit score better before trying to qualify.
- More money on hand – If you’re putting less money down on your house payment, that means you’ll have more money available for other expenses.
- Quicker qualification – You won’t need to jump through as many hoops qualifying for a lender with less examination of your records.
- No equity – When you borrow the full value of your property, you’re more financially at risk if the real estate market takes a downturn. Without equity in your home right from the start, loss of value from a declining real estate market can lock you into a less flexible position.
- Higher risk – Since you’re not putting down any money, you will likely be perceived as a higher risk by the lender, which means you’ll also likely pay a higher interest rate on your loan. Lenders charge higher mortgage rates to borrowers with lower credit scores and/or with no down payments.
- Higher fees – You’ll probably pay higher fees on your mortgage payments too — as well as mortgage insurance premiums
- Monthly mortgage payment – Because of all these cons above, your monthly payment will likely be higher too.
Low down payment loans
If you don’t qualify for a USDA, VA loan or Navy loan, there are still ways to pay less of a down payment than normal but not $0. Here are a few of those options.
Contrary to popular belief, you don’t need a standard 20% of the value of your home as a down payment to qualify for a conventional loan. And depending on your lender, you can get a loan with as little as 3% down. To qualify for a conventional loan, you may need at least a 620-640 credit score. However you consequently may be subject to a PMI payment.
A PMI (Private Mortgage Insurance) requirement as a condition of your loan if your down payment is less than 20% of the loan amount protects your lender, if you stop making payments on your loan. Regardless of the fact that you’re the one paying for it, PMI offers no benefits at all to you. As a result, most people want to cancel PMI as soon as possible. You can contact your lender and request that they cancel your PMI plan as soon as you reach the 20% equity point in your home via your payments on your mortgage loan.
Federal Housing Administration (FHA) loans, which you can get with as little as 3.5% down, are loans for people who have low to moderate income. FHA loans have fewer requirements than USDA and VA loans. For these loans, you need to live in the house you’re buying as your primary residence, you also need to buy a home that meets livability standards and move in within 60 days of closing. For a 3.5% down payment FHA loan, you’ll need a credit score of at least 580.
You’ll also need to pay for mortgage insurance throughout the life of the loan, if you have a down payment of less than 10% of the sale price of the home. It’s also possible to get an FHA loan, build 20% equity in your house and then refinance to a conventional loan as a workaround. This will eliminate the lifetime-of-the-loan mortgage insurance requirement.
Government-backed USDA, VA, and Navy loans can indeed let you buy a home with $0 down. If you qualify. However most people can’t qualify for those. And therefore most home buyers will need to put down at least 3 to 5 percent or more of the cost of the home to get a mortgage. But no matter what kind of loan you get, you should make sure you can truly afford the mortgage payments every month in addition to the other costs of owning a home (insurance, repairs, maintenance, etc) every month.