So you’re finally in a position to buy a house! You’ve been following our home buying steps, asking the right questions, and researching all your options. Perhaps you’re excited about getting that little cottage house with oak wood floors and cute breakfast nook. Maybe you have your eyes set on the more modern house with big open spaces and state-of-the-art technology. But knowing that houses are a huge investment, did you know that can buy a house with no money down?
Having a zero down payment mortgage can significantly help home buyers (especially first-time buyers) purchase the home of their dreams! Most financial experts recommend saving for 20% down payment but it is common to be unable to meet that percentage. In fact, according to Realtor.com, the average millennial home buyer can only put down 8.8% down payment as of December 2018. With zero down payment mortgages however, the lender provides 100% of your financing – allowing you to overcome one of the biggest hurdles of home ownership.
Though no money down mortgages aren’t as common nowadays, now is still a terrific time to look at buying a house! Sales are rising, supply is dropping, and mortgage rates are low. Here at Financial Professional, we strive to help you explore and learn the various home buying options so you can determine what works best for you. You’ll be living in your dream home soon enough!
Before we continue, Financial Professional wants to remind you that all materials in this article are educational in nature. This article is not investment advice. Always consider your personal situation – and the help of a licensed financial professional – when making any investment decisions.
Zero Down Payment Mortgage Options
First, let’s see if you qualify to buy a house with no money down! As of right now, you can only get a zero down payment mortgage if you take out a government-backed loan. A government-backed loan is usually less risky for lenders because if a borrower fails to pay, the bill falls to the government. This guarantee against losses for the lender is why this option is offered nationwide. You just have to check the specific eligibility requirements for the three main loan types – USDA loans, VA loans, and Navy Federal loans.
One note to keep in mind however, is that financing 100% of a home means you have no equity or direct ownership. Should there be complications, a zero-down payment waives sufficient claim to the house. Lenders may also label you as a high-risk borrower and require you to pay private mortgage insurance (PMI). So, if you default (fail to pay) on the loan, PMI companies will charge 0.5% – 1% of the total loan annually. Zero down payment mortgages usually also carry higher interest rates than conventional mortgages.
USDA Rural Development Housing Loans
The U.S. Department of Agriculture (USDA) offers this loan to encourage development in rural and suburban areas. It’s more directed at remote area residents, but may be applicable to other regions. It depends on the specific address and if the USDA considers it as “rural” enough.
Check out the map on USDA Property Eligibility site to verify if your dream home qualifies. Anywhere outside an orange zone qualifies as a rural zone. As long as you are looking at a single-family unit as your primary residence, you meet the location requirement. Some of these locations even include college towns like State College, PA and the suburbs of Columbus, OH.
You must also meet the financial requirements to qualify for zero-down payment. Since the USDA program’s intent is to help low- to moderate-income households, applicants must be below certain income thresholds. The borrower must have a household income up to, but no higher than, 115% of the median income of the area.
Furthermore, your credit score has to range from a minimum of 600 to 640. In exchange for down payments, there are upfront fees of about 3.5% of the total loan amount. The total fees and income limits varies depending on the region and people in the household, but may be more ideal than some of the alternatives.
Veteran Affairs (VA) Loan
If you or your spouse are an active-duty or former member of the military, you may qualify for a loan from the U.S. Department of Veterans Affairs. Since World War II, this program has granted 100% financing and zero down payment to accepted members. Members can finance a home purchase up to $484,350 with loan sizes up to $765,000 in high-cost regions, with typically much lower interest rates than conventional mortgages. However, just like the USDA loans, there are several requirements you must meet first.
- Served 90 consecutive days of active service during wartime
- Served 181 consecutive days of active service during peacetime
- Deployed for more than 6 years in the National Guard or Reserves
- Be the spouse of a service member who died in the line of duty or from a service-related disability
Although the VA does not have any credit score requirements, most VA lenders ask for a minimum score of 620. In addition, you have to pay a “funding fee” that depends on the military service, down payment amount, and whether a VA loan was approved in the past. Usually this amount is below 3% of the total loan. Most of the time, you can choose to pay upfront or have it added to the total loan amount. But to sweeten the pot, not only do qualified applicants get zero-down payment, but they also become able to utilize intermittent occupancy loopholes. Members also do not have to pay for mortgage insurance.
Navy Federal Credit Union Loans
Very similar to the VA loans, Navy Federal Loans are eligible only to military personnel, U.S. Department of Defense employees and their families. Although there is also a funding fee, it is a flat rate and might even be lower than the VA loan – as low as 1.75% of the total loan.
Low Money Down Mortgage Options
If you didn’t qualify for the zero down payment mortgages, don’t be discouraged! There are still plenty of alternatives available to help with the down payment obstacle. You may even find that these options are more suited for your situation and provide more ownership of your future home to be.
Federal Housing Administration (FHA) Loan
While these loans may not grant zero-down mortgages, they do allow buyers to put down payments as low as 3.5%. It is government-sponsored, so if you’re a public service employee, you may even want to look into the “Good Neighbor Next Door loan” that offers as low as $100 down on a house!
FHA loans are much more lenient than some loans and only require a minimum credit score of 580 and a debt-to-income ratio below 43%. Note that you may still qualify if your credit score is between 500 – 579, but the down payment increases to 10%.
Be mindful though that the FHA requires private mortgage insurance paid upfront at a higher interest rate. This will likely increase your monthly payment.
The good news though is that the FHA allows payments through financial gifts from relatives, spouses, nonprofit organizations or other sources. Depending on the region, you may even be granted a higher loan if the region’s living costs are more expensive. For more information on your situation, you’ll need to contact a qualified FHA lender.
Conventional mortgages are home loans that aren’t government-sponsored but still provide generously low down payments. Because of this, the majority of home buyers choose conventional mortgages over government-based loans. The U.S. Census Bureau even reported that 75% of home purchases in 2018 were funded by conventional loans – the most popular two being Fannie Mae HomeReady Loans and Freddie Mac Home Possible Loans.
Fannie Mae offers down payments as low as 3% and allows for co-borrowers who don’t live on the property. Since this program caters towards multi-generational families, it offers a very broad definition of “household income” to qualify for the program – including boarder income. It is also currently available from nearly every U.S. lender with very low mortgage rates and costs.
Some of the program’s requirements:
- Income must be at or below 80% of the region’s median income
- Minimum credit score of 620 but better pricing if above 680
- Debt-to-income ratio has to be lower than 45%
Likewise, Freddie Mac also allows a minimum 3% down payment and co-borrowers. It requires a slightly higher minimum credit score of 660 for a fixed-rate mortgage, 680 for adjustable-rate mortgage, and 720 for manufactured homes.
While the majority of consumers opt for conventional mortgages because they are the cheapest long-term option, government programs tend to have more flexible qualification criteria, such as financial requirements. Not to mention that government programs offer potentially no money down payments when buying a house.
State and Local Home Buyer Assistance Programs
Another option to look into are local loans that vary depending on the region. Your state, county, and/or even municipality may offer home-buyer assistance programs that help with down payments, closing costs, low interest rates, or a combination of the three.
However, keep in mind that these programs target those in financial need – so there will be income limits! Some of these limits may even be so specific as to limit applicants to first-time home buyers or people in particular professions. Either way, it is definitely something to research into so that you can buy your house as soon as possible.
General Tips For How to Buy a House With No Money Down
As you probably realize looking through zero-down and low money down mortgage options, there are a few financial requirements near-universal to these types of loans. One of the primary requirements is that potential homeowners must have a good credit score. While credit scores may seem intimidating, it’s best to first check your credit to know where you currently stand before panicking! There are plenty of free credit scoring websites including Experian and Equifax. You can also ask your credit card company or a nonprofit credit counselor to check your credit, often for free.
From there, try to boost your credit to achieve the minimum credit score for the program you’re looking to apply. Pay as much debt as you can in the shortest amount of time possible to increase your credit score faster. Credit card companies LOVE it when you pay bills on time, so a good payment history also helps. One way to help you keep on top of bills is to start financial planning and make a budget. Reduce the amount you put on your credit card and take out only as much as you can pay back. It may even help to apply for a secured credit card which requires a deposit paid in full but will help with credit.
Lastly, always remember you are not alone! There are many people who have no money down when buying a house. To counteract this reality, many down payments allow gift funds from sources like relatives, nonprofit organizations and government agencies. Gift guidelines vary depending on the program, but there is never any harm in asking.
- Check your credit score
- Increase your credit score using tips and budgeting
- Check gift fund guidelines
Is a Zero-down Payment Mortgage Right for Me?
Every financial situation is different, so we don’t expect zero-down mortgages to work for everyone! There are other types of mortgages that may be better suited for you – especially if you can afford a down payment. However chances are, you are looking to save as much money as possible and not break the bank. That’s where the zero-down payment and even low money-down mortgage options can help.
By exploring these options, you may be able to buy a house sooner than you originally thought with no money down and still keep your emergency savings fund. Perhaps government-sponsored loans like the USDA, VA, or FHA loans are more appealing to you because of their flexible qualification requirements. Or perhaps the conventional mortgages suit your situation better as cheaper long-term alternatives.
Either way, remember that every financial choice has its pros and cons. In exchange for zero-down payments for example, you have to pay for private mortgage insurance (PMI) and borrow more money. This means a larger monthly payment, but in the long run it could be easier to pay than a full 20% down payment. Assess your situation carefully before making a final decision and you’ll be able to live in your new home free of financial worries!