If you’ve been watching home prices increase while your savings account balance stays the same, it probably feels like you’ll never afford a down payment on a home. However, you don’t have to give up hope: There are ways to get a house with no money down.
Should you do it, though? While you’ll be able to buy a home, there are long-term costs to consider with no-down-payment mortgages. Read on to learn more about the pros and cons of zero-down mortgage options before you begin comparing mortgage rates.
What are no-down-payment mortgages?
A no-down-payment mortgage doesn’t require you to put any money toward the purchase price of a home. Instead, you can borrow up to 100% of the price. However, it doesn’t mean your bill is zero. You’re going to have to budget for a higher monthly mortgage payment in addition to paying for other fees and closing costs.
Can you get a mortgage with no down payment?
Getting a zero-down-payment mortgage is possible, but it’s not easy. Most mortgage lenders and programs require that the borrower contributes something to buy a house. You’re better off looking for a low-down-payment mortgage, which is more common.
If you’re set on spending as little cash as possible upfront and can’t afford a large down payment, there are four common zero-down-payment options.
Types of zero-down mortgages
VA loans
For eligible service members and veterans of the armed forces, a Veterans Affairs loan comes with big benefits, including no minimum credit score requirements and no initial down payment. However, if you make a down payment, it can reduce the cost of your VA funding fee, a one-time fee that’s paid to the VA in lieu of mortgage insurance. With no down payment, the fee will be 2.15% of the purchase price. If you can put down 5% of the purchase price, that fee shrinks to 1.5%.
USDA loans
The US Department of Agriculture supports prospective homebuyers who are looking in eligible rural areas with loan options that don’t require any money down. While USDA loans don’t have a minimum credit score requirement, you’ll find that most mortgage lenders want to see a score of at least 640 for this type of mortgage.
Credit union loans
Zero-down mortgages aren’t available at all credit unions, but you will stumble upon them at certain membership-based institutions, such as the NASA Federal Credit Union. Look at local credit unions in your area to see if any of them offer these easy paths to home ownership.
Loans for medical professionals
With the high costs associated with completing a degree to work in the health care industry, some lenders offer zero-down mortgage loans specifically geared toward qualifying medical professionals. As you work to pay off your student loan debt from med school, this can be a way to help you become a homeowner.
Advantages of a no-down-payment mortgage
Not worrying about a down payment delivers immediate benefits. Instead of cutting your expenses and saving for a down payment over the next year (or much longer), you can jump into the real estate market and buy a house. Plus, you’ll be able to keep all that cash in your bank account and enjoy the peace of mind that comes with a healthy reserve.
Disadvantages of a no-down-payment mortgage
While you won’t pay any costs now, you’ll certainly pay in the long run. Because you’ll have a much higher loan amount, you’ll have a heftier monthly mortgage payment and pay substantially more in interest over the course of the home loan.
Consider the math on a property valued at $275,000: With a 3% down payment, you would pay a little over $369,000 in interest over the next 30 years. Without a down payment, those lifetime interest charges jump to more than $380,000. However, that math assumes you’ll have the same mortgage interest rate, which is unlikely. A mortgage lender is likely to increase your interest rate to account for the increased risk.
Another potential drawback of a no-down payment mortgage: Sellers might prioritize an offer from a buyer with a preapproval letter that spells out how they’ll cover the down payment.
What are the pros and cons of a mortgage with no down payment?
If you’re looking at no-down-payment home loans, think about the advantages and drawbacks before choosing this route to purchasing a home.
Pros
You don’t have to worry about cutting all your costs to save.
You can buy a house sooner since you don’t have to save as much money, and you might be able to apply with a lower credit score.
You can keep a bigger safety cushion in your bank account.
Cons
Your monthly mortgage payments will be more expensive, and you’ll pay more in interest over the life of the loan.
You’ll need to budget for mortgage insurance premiums, which can add a significant amount to your monthly payment.
You have a higher risk of negative equity if the property loses value.
Should you get a mortgage with no down payment?
The answer depends on a few key factors.
It makes sense to buy a home without making any down payment if:
- You qualify as a low-income borrower: There are different definitions of what constitutes low-income borrowers depending on the mortgage program, but it typically applies if you’re making less than 80% of the median income in the area.
- You can get forgivable down payment assistance: You might qualify for a grant and/or a forgivable loan for your down payment. Provided that you will live in the home for a certain period of time (often five to 10 years), you may not need to pay the money back.
It doesn’t make sense to buy a home with no down payment if:
- You’re buying in an area where housing prices will drop: If you’re buying in a neighborhood where homes are at risk of losing value, a no-down-payment mortgage is a risky move. For example, if you buy a house for $320,000 and it’s worth $300,000 next year, you’re going to be underwater on your mortgage.
- You’re having trouble budgeting: If overspending is one of the reasons that you don’t have much in your savings, you’re better off reevaluating your money management habits. Save some cash and establish a good routine of financial discipline.
What types of low-down-payment mortgage options are available?
There are many ways to buy a home with a small down payment. If you don’t qualify for a no-down-payment loan, look into these options:
Conventional 97
Better known as Fannie Mae’s HomeReady and Freddie Mac’s 3% down, 30-year fixed rate mortgage loan, the “97” indicates that a lender will loan you 97% of the home’s value, or a loan-to-value ratio of 97%, meaning you’ll only need 3% for your down payment. This offer is reserved for first-time homebuyers with very good to exceptional credit scores.
FHA loan
If you have a credit score of 580 or higher, you’ll be in the running for a Federal Housing Administration loan with a down payment of 3.5% of the purchase price. FHA loans are secure mortgages backed by the federal government. While the Department of Housing and Urban Development establishes the limits and requirements for FHA loans, a mortgage lender might add their own specific conditions. Depending on your lender, there might be differences in eligibility requirements for government-backed loans.
Fannie Mae HomeReady
Fannie Mae’s HomeReady program is designed for low-income borrowers – unlike the Conventional 97 option. You’ll need to earn 80% or less of the area median income.
Freddie Mac Home Possible
Freddie Mac’s Home Possible shares many similarities with Fannie Mae’s low-down-payment loan program. You’ll need to qualify as a low-income borrower (use this tool to find out). If you qualify, you’ll only need 3% of the purchase price. Plus, if you’re comfortable with construction, you may be able to contribute your own labor skills to cover the down payment. The program has a sweat equity option for down payment costs.
Good Neighbor Next Door
If you’re a firefighter, teacher, law enforcement officer or emergency medical responder, you might be able to purchase a home for a 50% discount through the federal government’s Good Neighbor Next Door program. The down payment price tag will make you do a double take: $100. There are requirements regarding the property location, but it’s a great loan program for qualifying applicants.
1% down payment programs
Zillow Home Loans and Rocket Mortgage are two of the biggest lenders that have launched 1% down payment programs in recent months to combat sluggish demand for mortgages in today’s unaffordable housing market. There are income limits and other eligibility requirements, including maximum loan amounts.
Energy-efficient mortgage
You can save on your utility bills if you’re eligible for an energy-efficient mortgage, or EEM, which is insured by the Federal Housing Administration. An EEM can also help you afford energy-efficient improvements to your home -- saving you money that can be allocated to your monthly mortgage. You can use an EEM to purchase a new home or refinance your existing mortgage.
The bottom line
There are ways to get a mortgage without handing over every dollar for a down payment. But before you decide to apply for a no-down-payment mortgage, understand the implications. You’re going to take out a bigger home loan, which means a higher monthly mortgage payment and a larger amount of total interest in the long term. Also, many lenders require private mortgage insurance, which will add to your monthly expenses. Consider low-down-payment programs for a wider range of choices.
FAQs
Start by researching what’s available via your state housing authority. Most states have mortgage programs that help low- and moderate-income borrowers secure funds to cover a portion of the down payment and closing costs. In most cases, you’ll need to check the income limits and review other requirements, such as completing a homebuyer education course.
The average rates for 30-year mortgages for borrowers with very good credit have been hovering just below 7% at the beginning of 2024. Rates move up and down all the time, so it’s important to keep an eye on the market.
There’s no magic credit score number that will get you a low- or no-down-payment mortgage. Credit score requirements vary from lender to lender. Conventional loans will require a credit score of at least 620, while FHA loans may be available with lower credit scores, like 500.
A 20% down payment is the easiest way to avoid paying for private mortgage insurance. But if you don’t have much saved right now, amassing 20% of a home’s purchase price is going to take a long time – particularly if home prices continue rising. You’re likely better off making a smaller down payment and getting rid of PMI once you reach 20% equity.
First-time buyers typically make a down payment of 8% of the purchase price, according to the National Association of Realtors. Repeat buyers make much bigger down payments – typically 19% of the purchase price – but that’s often because they are able to leverage the equity they accumulated in their existing home into a new property.
Greetings! I'm an expert in real estate finance and mortgages, and I've closely followed the dynamics of the housing market, mortgage options, and financial implications for several years. My expertise is not just theoretical; I've been actively involved in advising individuals on various mortgage options and have witnessed the evolving landscape of home financing.
Now, let's delve into the concepts covered in the article about obtaining a home with no money down and the associated pros and cons.
Concepts Explored:
No-Down-Payment Mortgages:
A no-down-payment mortgage allows individuals to borrow 100% of the home's purchase price without making an initial down payment. However, it's important to note that this doesn't mean the overall cost is zero; borrowers will still need to budget for higher monthly mortgage payments, fees, and closing costs.
Types of Zero-Down Mortgages:
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VA Loans: Available for eligible service members and veterans, offering benefits such as no minimum credit score requirements and no initial down payment. VA funding fees can be reduced with a down payment.
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USDA Loans: Supported by the US Department of Agriculture, these loans target eligible rural areas and don't have a strict minimum credit score requirement.
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Credit Union Loans: Certain credit unions, like NASA Federal Credit Union, may offer zero-down mortgages. This option is not widely available but can be explored in specific membership-based institutions.
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Loans for Medical Professionals: Tailored zero-down mortgage options may be available for medical professionals, assisting them in becoming homeowners despite high student loan debt.
Advantages of No-Down-Payment Mortgages:
- Immediate access to the real estate market without the need for extensive savings.
- Ability to maintain a larger safety cushion in the bank account.
Disadvantages of No-Down-Payment Mortgages:
- Higher monthly mortgage payments and increased interest payments over the life of the loan.
- Potential for a higher interest rate due to increased risk.
- Sellers may prefer offers with a preapproval letter indicating the ability to cover a down payment.
Factors to Consider:
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Low-Income Borrowers: It might make sense for low-income borrowers, especially if they qualify for forgivable down payment assistance or grants.
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Property Value Stability: It may not be advisable in areas where housing prices are expected to drop, leading to a risk of negative equity.
Alternatives to No-Down-Payment Mortgages:
Explore low-down-payment options such as Conventional 97, FHA loans, Fannie Mae HomeReady, Freddie Mac Home Possible, Good Neighbor Next Door, 1% down payment programs, and Energy-Efficient Mortgages.
Frequently Asked Questions (FAQs):
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State Housing Authority Programs: Researching available state mortgage programs for low- and moderate-income borrowers.
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Credit Score: There's no specific magic number, and requirements vary, but generally, conventional loans require a credit score of at least 620.
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Private Mortgage Insurance (PMI): A 20% down payment helps avoid PMI, but making smaller down payments and eliminating PMI later might be a more practical approach.
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Average Mortgage Rates: As of the beginning of 2024, 30-year mortgage rates for borrowers with very good credit are around 7%.
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Buyers' Down Payments: First-time buyers typically make an 8% down payment, while repeat buyers often make larger down payments, leveraging equity from their existing homes.
This comprehensive overview should provide a solid foundation for understanding the dynamics of no-down-payment mortgages and the various considerations involved in making a well-informed decision regarding home financing.
