Zero Down Mortgages: Are They Right For You? Show
What is a Zero Down Payment Mortgage?A zero down payment mortgage is exactly what it sounds like: a mortgage that requires no money down at closing. Buying a home and putting no money down to do it sounds appealing to many, but in reality it’s hard to get a zero down payment mortgage in this climate, as banks no longer offer them to most consumers. Hard, however, doesn’t mean impossible. Here’s how you can score a zero down payment mortgage — and the pros and cons of getting one. Not everyone will qualify for a zero down payment loan, but in circumstances, you might be able to buy a house with no money down. If you’re a veteran, you might be able to get a VA loan with no down payment from the U.S. Department of Veterans Affairs (VA). In order to qualify for the loan — you’ll need good credit, enough income and a Certificate of Eligibility from the VA — but if you do, you may be able to enjoy these perks: no down payment on the home (as long as the sales price isn’t higher than the appraised value of the home), no private mortgage insurance premium and limited closing costs. The second option for a no down payment loan is a USDA loan. The United States Department of Agriculture offers a variety of these loans with low interest rates. Most of the loans are designed to help low- or moderate-income people with decent credit buy a home in a rural area. Two of the more popular USDA loans are the single-family direct homeownership loan and the single-family guaranteed homeownership loan. The single-family direct homeownership loan is for low- or very low-income borrowers purchasing homes in rural areas. Eligible properties must be 1800 square feet or less with a market value below the applicable area limit. No swimming pools or properties designed for income-producing activities are allowed. The household adjusted income of the borrower must not exceed the applicable low-income limits for the area. The single-family guaranteed homeownership loan helps those with incomes that are below 115 percent of the median income for the area buy modest homes in rural areas. If coming up with a down payment is a struggle, an alternative to buying a house with no money down is an FHA loan. The FHA does not offer a no-money down loan. However, they do allow for loans with a down payment as low as 3.5% of the home’s purchase price. Lenders offing a FHA loan are also restricted in the fees they are allowed to charge you.
Pros and Cons of a Zero Down Payment LoanThe perks of a zero
down payment mortgage are simple: You can get a mortgage to buy a home without having to put any money down. This means those without savings could buy a home. Though that sounds appealing, it does come with downsides. For one, you’ll have no equity built up in your home at the time of purchase, so you won’t be able to do things such as take out a home equity loan or home equity line of credit if you need to
do home repairs or have other expenses you need to take care of. Plus, you’ll likely be paying off this home loan for longer than someone who had put money down would, which means you’ll likely be paying the bank thousands more in interest payments over the life of the loan. Bottom LineMost 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 — with a down payment or without — make sure you can truly afford the mortgage payments and the other costs of homeownership (insurance, repairs, etc.) every month. Use Zillow’s free mortgage calculator to help estimate your monthly mortgage costs or our affordability calculator to determine what you can truly afford. Buying a home? Find a local lender on Zillow who can help.You don’t need to put 20% down to buy a home. You can buy a house with no money down by applying for a loan guaranteed by the U.S. Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (USDA). Even if you’re not eligible for these government-backed zero-down loans, you may qualify for homebuyer assistance programs that allow you to cover the cash needed for both your down payment and closing costs.
No-down payment mortgage optionsThere are two government-backed 0%-down-payment loan options. The VA loan program is specifically for military borrowers, while the USDA loan is aimed at low- to moderate-income borrowers buying homes in designated rural areas. VA loansVA loans are only made to active-duty service members, veterans and eligible surviving spouses. They are guaranteed by the VA and offered by VA-approved lenders. Even with no down payment, you don’t have to pay mortgage insurance, giving you a lower monthly payment compared with other low- or no-down-payment home loan options. An added bonus: The VA removed loan limits, which means VA borrowers can buy higher-priced homes with no down payment. To buy a house with a no-money-down VA loan you need to:
USDA loansThe USDA loan program provides low- to moderate-income homebuyers with no-down-payment mortgages to buy homes in USDA-approved rural areas. Although no mortgage insurance is required, eligible borrowers must pay an upfront guarantee fee and an annual guarantee fee that becomes part of the monthly payment. To buy a house with a no-money-down USDA loan you need to:
THINGS YOU SHOULD KNOWThere are two home loan programs offered by the USDA: the Single-Family Guaranteed Loan Program (SFGLP) and the Single-Family Housing Direct Home Loan (SFHDHL). The SFGLP is offered by USDA-approved lenders, while the USDA Direct Loan program is offered directly through the rural development office. Down payment assistance loansIf you aren’t eligible for VA or USDA zero-down loans and don’t have the cash for a down payment or closing costs, a down payment assistance (DPA) loan is your next best bet. The U.S. Department of Housing and Urban Development (HUD) provides funds to all 50 states to contribute to down payment programs. DPA funds can be used to cover the low-down-payment requirements of loans offered by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). For example, the Fannie Mae HomeReady® program only requires a 3% down payment, which could come from a DPA program offered in your area. There are typically two ways you’ll receive DPA money: as a grant, or as a second mortgage. Here are the basics of how each works:
Besides qualifying for the mortgage that’s tied to your DPA loan, you may have to meet specific guidelines that may include:
Doctor loansSome lenders offer no-down payment programs for medical doctors and dentists, with higher loan limits than standard conventional mortgage programs and no mortgage insurance requirement. Pros and cons of no-down payment home loansThe biggest benefit of no down payment is that you can buy a home without emptying your bank account. However, a larger loan amount also means a higher monthly payment and closing costs. Because closing costs are about 2% to 6% of your loan amount, the more you borrow, the more you’ll pay. Here’s a breakdown of other no down payment pros and cons worth considering:
Should I get a no-down payment loan?You should get a no-down payment loan if:
Low down payment mortgage optionsIf you don’t qualify for any of the no-down payment options listed above, you may consider low-down-payment mortgage programs. All of the programs listed below allow you to use down payment assistance to meet both the minimum down payment and closing cost requirements of each loan. Fannie Mae HomeReady loansYou’ll only need a 3% down payment to buy a home through the Fannie Mae HomeReady program. However, check the Fannie Mae lookup tool to make sure your income is within the income limits. To qualify under Fannie Mae HomeReady guidelines you’ll need to:
Freddie Mac Home Possible loansWith a 3% down payment, you could get a Freddie Mac Home Possible® loan and qualify with the earnings of a co-borrower that doesn’t live in the home. Income limits apply, and the credit score requirements are higher than the Fannie Mae program. You may qualify for a Freddie Mac Home Possible loan if you:
Conventional 97%Also called the Fannie Mae Standard 97% loan, this program has no income or neighborhood limitations and only requires a 3% down payment for qualified borrowers. There is a homebuyer education requirement if all of the applicants are first-time homebuyers. FHA loansMortgages insured by the Federal Housing Administration (FHA) require a bigger down payment of 3.5%, but allow for much lower credit scores than other low-down-payment loan programs. FHA borrowers typically qualify if they:
Keep in mind, these are the most popular low-down payment programs. Ask your lender about other first-time homebuyer programs that you might qualify for. Piggyback loansIf you have 10%, you can try a piggyback loan, which involves getting a home equity loan or home equity line of credit (HELOC) for another 10%. Also known as an 80-10-10 piggyback loan, you’ll avoid mortgage insurance and have a lower total payment than no-down or low-down payment loans. THINGS YOU SHOULD KNOWOne of the disadvantages of many low down payment programs is having to pay mortgage insurance. Mortgage insurance protects lenders against losses if you default and is required on both conventional and FHA mortgages with less than a 20% down payment. Conventional private mortgage insurance (PMI) can be removed once you have 20% equity in your home. You’ll pay two types of FHA mortgage insurance: MIP and UFMIP. The upfront mortgage insurance premium (UFMIP) is 1.75% of your loan amount financed into the mortgage. The mortgage insurance premium (MIP) is charged yearly, divided by 12 and added to your monthly payment and is paid for the life of your loan if you make a minimum down payment. FAQs about down paymentsAre zero-down mortgages a good idea? If you have a stable job and income and extra rainy day money in the bank, a zero-down mortgage may be a good way to get your feet wet in homeownership. What is the minimum down payment for a mortgage? No down payment is required for VA, USDA and doctor loan programs detailed above. What credit score do I need to buy a house with no money down? No-down-payment lenders usually set 620 as the lowest credit score to buy a house. You can boost your credit score by keeping your revolving charge card balances to a minimum and paying all your bills on time. How do I find down payment assistance programs in my area? Check with local or state housing authorities or local housing nonprofits to learn about homebuying assistance in your area. Can I use a gift for my down payment or closing costs? All the low-down-payment loan programs outlined above allow for gifts for your down payment, plus closing costs up to a set limit. Check with your employer to see if they offer any homebuying benefits. Do you have to put 20% down on a conventional loan? No. However, a 20% down payment will help you avoid PMI on a conventional loan, and borrowing less means your monthly payment will be lower. How can I get money for a down payment on a house? Setting up a down payment fund, using a savings app and setting aside tax refunds, bonuses and commission income over time or getting a side hustle for extra down payment income are just a few ways you can save for a down payment. How much are lender fees on a no-down payment loan? Mortgage companies typically charge origination fees based on a percentage of your loan amount. For example, a 1% origination fee on a $300,000 loan amount would cost you $3,000. The higher your loan amount, the higher the lender fee. What is the lowest possible down payment for a house?You may have heard that a down payment should be 20% of a home's purchase price, and while it does have advantages, it's not necessary. A Federal Housing Administration (FHA) Mortgage has a minimum down payment of only 3.5%. It's available to all qualified buyers, regardless of income level.
Can I get pre approved with no down payment?There are currently two types of government-sponsored loans that allow you to buy a home without a down payment: VA loans and USDA loans. Each loan has a very specific set of criteria you need to meet in order to qualify for a zero-down mortgage.
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