One of the biggest hurdles to becoming a homeowner is saving enough money for a down payment. While it’s a common myth that you need a 20% down payment, it can still keep potential homebuyers from making the step to homeowners. There are plenty of zero-down mortgages to help you buy a house with no money down.
In this Redfin article, we’ll help you understand how to buy a house with no money down, what mortgages you may qualify for, and what resources can help you buy your first home. Whether you’re looking to buy a home in Portland, OR, or a condo in Nashville, TN, there are ways to buy a home with no down payment.
Key takeaways
- You can buy a home with no down payment.
- USDA and VA loans are the two loans that offer zero-down payment mortgages.
- There are low-down payment loans available if you don’t qualify for USDA or VA loans.
Can you buy a house with no money down?
Yes, you can buy a house with no down payment. Homebuyers can get a zero-down mortgage if they qualify for a VA or USDA loan. Additionally, if you’re a first-time homebuyer, there are programs available to help make buying a home more affordable. A first-time home buyer is usually classified as someone who has never purchased a home before or has not owned a home in the last three years.
What is a zero-down mortgage loan?
A zero-down mortgage loan is a type of loan that doesn’t require you to make a down payment. A down payment is the first payment you make towards your home. For example, a 20% down payment on a $400,000 home is $80,000. It’s due during closing, and lenders calculate it as a percentage of the home’s purchase price. With a zero-down mortgage, you can borrow the full amount needed to purchase the home.
A down payment is a signal to your mortgage lender that you’re less likely to default on the loan. In many cases, the higher the down payment, the more favorable loan terms you’ll qualify for. However, the down payment is often the biggest hurdle in buying a home. So, there are no down payment loan options out there.
No down payment loans are government-backed loans. That means they’re insured by the federal government, unlike conventional loans that are backed by private institutions like banks. VA and USDA loans are the two primary loan types that offer zero-down payment mortgages. These loans may be difficult to qualify for as they have rigid requirements. Many other loans offer low down payment options if you don’t qualify for VA or USDA loans.
Loan options for no down payment mortgage
As mentioned above, VA and USDA loans offer no down payment mortgages. Let’s explore their requirements.
VA Loans
Requirements
- Certificate of Eligibility
- Zero-down payment
- Credit score of at least 580-620
- Debt-to-income ratio at or below 40%
VA loans are backed by the Department of Veterans Affairs. Active duty service members, veterans, past or current members of the National Guard or Reserve, spouses of deceased veterans, and other beneficiaries who meet eligibility criteria can apply for VA home loans. When applying, you’ll need to provide a Certificate of Eligibility from the VA in order to qualify.
Even with no down payment, there are still some fees associated with a VA loan. If you have a down payment below 5%, including no down payment, you’ll need to pay a one-time funding fee. The fee ranges from 1.25 to 3.3% and replaces the need for mortgage insurance.
USDA loans
Requirements
- Homes must be located in an eligible area
- Zero-down payment
- Credit score of at least 640
- Debt-to-income ratio at or below 40%
- Income must not exceed 115% of the area’s median income
Backed by the U.S. Department of Agriculture, USDA loans can be a great option for those living in certain rural or suburban areas. The USDA offers loans that allow for 100 percent financing, meaning borrowers can put zero-dollars down and finance the entire purchase price.
To qualify for a USDA loan, the property must be located in a qualifying rural or suburban area. You can use the USDA Eligibility map in order to see whether your location or home qualifies. Areas not marked in orange are considered a rural area, which accounts for nearly 97% of the country. So it’s possible more suburban areas may qualify for a USDA loan. Additionally, your home cannot be a working farm – it has to be a primary residence that you live in.
There are also a few income requirements to qualify. Your combined gross income can’t be above 115 percent of the median income level for the area. Your DTI (debt-to-income ratio) can’t exceed 41%. DTI is the ratio of how much you owe each month versus your income per month.
Pros and cons of a zero-down mortgage
As a first-time homebuyer, a zero-down mortgage can make the path to homeownership that much easier. However, there are pros and cons to consider.
Pros of no down payment
- Becoming a homeowner faster: You won’t have to spend additional time saving up for a higher down payment.
- Financial flexibility: You can use your savings for other needs or investing.
Cons of no down payment
- Higher interest rates: You’ll likely have higher interest rates on your mortgage, which will continue as long as you own the home.
- Higher monthly payments: With higher interest rates comes higher monthly payments. Depending on the loan, you may also have to pay mortgage insurance.
- No immediate equity: Since you don’t have a down payment, you won’t have any equity in the home at the time of closing. That means you can’t take out a home equity line of credit (HELOC) for quite some time.
Options if you don’t qualify for a zero-down mortgage
Not every homebuyer will qualify for a zero-down mortgage. However, there are still options that help lower your down payment.
FHA loans
If you don’t qualify for a VA or USDA loan, there are still loans that offer low down payments. Backed by the Federal Housing Authority, FHA loans offer as low as 3.5% down as long as your credit score is at least 580. If your credit score is between 500 and 579, your down payment will be 10%.
FHA loans with a lower down payment require mortgage insurance premiums (MIP). MIP includes two costs – an upfront MIP paid during closing and an annual MIP paid with your mortgage. The upfront MIP is usually 1.75% of the loan amount and the annual MIP depends on your down payment, loan amount, and loan terms. If your down payment is less than 10%, you’ll continue paying MIP for the life of the loan. If you put 10% or more down, MIP drops off after 11 years.
Down payment assistance programs
There are plenty of assistance programs aimed to help buyers purchase a home. Many of these programs cater to first time homebuyers, but each state, city, and county is unique. Your real estate agent will be able to help you determine which programs you qualify for, whether you’re a first-time homebuyer or not.
There are three types of assistance programs – loans, grants, and credits.
- Loans: Often in the form of a second mortgage, these loans are typically deferred payment loans. In some cases, the loans may be partially or fully forgiven after residing in the home for a certain number of years. Depending on the program, you may have 0% interest.
- Grants: Typically, grants cover closing costs and are forgiven after living in the home for a specified amount of time.
- Credits: Also called mortgage credit certificates, they reduce what you pay in federal taxes by lowering how much you pay in interest on your mortgage.
Is buying a house with no money down right for me?
How much you put down on a house varies depending on your finances, goals, and more. When it comes to buying a house with no money down, it also heavily depends on whether you qualify for those loans. Even if you don’t qualify for a zero-down payment mortgage, FHA loans and down payment assistance programs may help you become a homeowner.
