Homebuyers often rely on external financing to purchase homes due to elevated real estate prices requiring significant down payments. However, numerous programs assist those with limited savings, enabling them to buy a house with little or no down payment.
This guide explores how to leverage these programs to minimize upfront homeownership costs and advises buyers to fully comprehend all associated expenses to choose the most financially viable home-buying route.
Can You Buy a House with No Money Down?
Most people cannot afford to buy a house without a down payment. Lenders require the down payment to shield themselves from market risks and limit losses in the event of a foreclosure.
However, specific government-backed loan programs allow some buyers to purchase a home with no money down. Buyers who do not qualify for the following zero-down loan options may still be able to use low-down payment alternatives discussed below.
How to Apply for a Zero-Down Loan
Prospective homeowners can secure zero-down loans through local banks and financial institutions in partnership with federal agencies, requiring no down payment. These loans, which require borrowers to meet certain eligibility criteria, function like traditional mortgages: homeowners receive funding from lenders to buy property and repay the loan plus interest over a set term.
Mortgage Deed
Part of this process involves signing a mortgage deed, a legal document that secures the loan by using the purchased property as collateral. This ensures that the lender can take possession of the property through foreclosure if the borrower fails to make the required loan payments.”
The possibility of zero-down loans stems from government backing, which guarantees repayment to lenders in case of borrower default, reducing lending risk and enabling more favorable terms.
While such loans eliminate the need for a down payment, buyers may still face other upfront costs, including closing fees, private mortgage insurance (PMI), appraisal, and escrow fees, depending on the lender and loan program.
VA Home Loans
The US Department of Veterans Affairs (VA) provides various benefits to military members and their families, one of which is access to a VA home loan. Eligible veterans, active military members, and surviving spouses may be able to apply for a VA home loan.
These loans provide several major benefits, including buying a house with no money down. Other key benefits of VA home loans are the limited closing costs, no need to obtain PMI, and its status as a lifetime benefit. To qualify, an applicant must meet the following requirements:
- Obtain a Certificate of Eligibility (COE) that verifies you meet the minimum length of service requirements
- Have a satisfactory credit score
- Have the income necessary to support the monthly loan obligation [1]
The minimum service requirements to qualify for a VA home loan can vary based on the military branch a person served under and the period in which they served. For example, National Guard and Reserve members who served before August 2, 1990, must have 6 creditable years, while members serving after August 2, 1990, are eligible with 90 days of active duty.
USDA Loans
Another zero-down option for homebuyers is to apply for a loan backed by the United States Department of Agriculture (a USDA loan). These loans make homeownership possible for low- and moderate-income buyers in rural parts of the country.
Several strict requirements exist for potential homebuyers looking to purchase a home with no down payment through a USDA loan.
- First, borrowers can only use a USDA loan on homes that are in eligible rural areas.
- Second, borrowers must be either a US citizen, a non-citizen national, or a qualified alien and agree to occupy the purchased property as their primary residence.
- The third major requirement for USDA loans is that borrowers cannot exceed the income-eligibility threshold for their location, which is 115 percent of the median household income [2] .
Pros and Cons of Zero-Down Mortgages
Borrower Pros
- Enables individuals to purchase a home sooner without the need to save for a large down payment.
- Allows buyers to retain their cash reserves for other uses, such as emergency funds or significant expenses.
Borrower Cons
- Results in a higher overall loan amount since it covers 100% of the home’s purchase price, leading to higher monthly payments.
- Involves more total interest paid over the life of the loan compared to loans with down payments.
- May come with higher interest rates and additional fees, increasing the total cost of homeownership.
Low-Down-Payment Mortgage Alternatives
Those who do not qualify or wish to use a zero-down payment mortgage may still have access to one of several low-down-payment mortgage alternatives that are also government-backed:
FHA Loans
What Are They?: FHA Loans are mortgages facilitated by the Federal Housing Administration for various purposes, notably for first-time home buyers.
Down Payment: It can be as low as 3.5% of the purchase price, contingent on the borrower’s credit score.
Credit Score Requirements: Minimum score as low as 500, but lower scores might necessitate higher down payments.
Other Requirements:
- Adherence to specific debt-to-income ratios set by the lender.
- Must not exceed area-specific loan size limits.
- Mandatory acquisition of mortgage insurance to safeguard against defaults.
Fannie Mae’s HomeReady® and Freddie Mac’s Home Possible® Loans
What Are They?: HomeReady® and Home Possible® are mortgage programs offered by Fannie Mae and Freddie Mac respectively, designed to support US homebuyers with low down payment options.
Down Payment: Both programs allow down payments as low as 3% of the purchase price.
Credit Score Requirements:
- HomeReady® does not specify a minimum credit score but focuses on borrowers with low income and considers alternative income sources.
- Home Possible® requires a minimum credit score of 660.
Other Requirements:
HomeReady®:
- Targets low-income borrowers without sufficient savings for a traditional mortgage.
- Qualification can include income from rentals, gifts, or grants.
- Income must not exceed program-specific limitations based on Area Median Income (AMI).
Home Possible®:
- Down payment sources can include gifts, grants, and sweat equity.
- The borrower’s income cannot exceed 80% of the AMI.
- Requires mortgage insurance until the loan-to-value ratio reaches 80%.
Other Down Payment Assistance Programs
Aside from low or zero-down payment loans, state programs and organizations may offer assistance to future homeowners to obtain funds for their down payment. State and federal programs may grant funds to various charitable organizations that disburse the funds to qualifying applicants.
Eligibility for these assistance programs varies from state to state and could depend on circumstances such as your heritage or occupation.
Ask for a Down Payment Gift from Family or Friends
Another option for raising funds to meet your down payment needs is to seek aid from family or friends who are able to support you. For example, parents, grandparents, and other older relatives may be in a financial position to gift funds for a down payment as part of an early inheritance.
If this is an option for you, be mindful of the need for a letter confirming the nature of the gift. The purpose of the gift letter is to avoid any confusion about funds being a loan, which could complicate future applications for a mortgage and create tension between family members down the road.
Get the Seller and Lender to Pay Your Closing Costs
Closing costs add to the upfront costs of home buying, posing a challenge for buyers with limited savings. A solution can be negotiating with the seller to pay these costs or with the lender to add them to the loan.
Negotiations with sellers depend on market trends and competition. While lenders might agree to include closing costs in the loan, it typically results in a higher interest rate and loan amount, ultimately increasing the total interest paid over the loan’s lifetime.
Frequently Asked Questions
What Kind of Credit Score Do I Need?
A credit score in the 600s will be the minimum needed for most low or zero-down payment mortgages. However, the better a person’s credit score, the more favorable mortgage terms they may be able to obtain, such as slightly lower interest rates at fixed rates. Review your credit score before submitting a mortgage application to understand your eligibility for different loan types. If your score needs improvement, look for issues that may be affecting the score, such as late payments, credit usage, and length of credit history.
What Are the Benefits of Putting More Money Down?
Putting more money down provides several benefits to homeowners beginning with having more equity in the property. This provides financial security that mitigates the risk of financial loss in real estate market downturns by being underwater on the mortgage in the event you need to sell.
The other benefits of placing more money down may include not needing to obtain private mortgage insurance and qualifying for improved loan terms. The equity from putting more money down could also be available in case of an emergency later on through a home equity line of credit or a cash-out refinance.
Can I Use a Credit Card for a Down Payment?
Sellers and lenders do not generally allow buyers to use their credit cards to pay for the down payment on a home because it is additional debt. Rather, cash is the preferred method of payment.
