What are no-down-payment mortgages?
A no-down-payment mortgage is a type of loan where you don’t have to put any money toward the purchase price of a home. Instead, you can borrow up to 100% of the price. However, these options usually come with a higher interest rate and steeper monthly payments.
- These loans are typically used by first-time buyers, people with low incomes, or those who cannot afford a larger down payment.
- They may be offered by government agencies, like the VA or USDA, or private lenders.
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 a borrower to contribute something, even as little as 3%, to buy a house. (More on low-down-payment options below.)
If you do qualify, there’s a trade-off: You’ll probably have a higher interest rate than you would if you contributed some funds to a down payment. With a larger home loan, that’s more risk for the lender, and that lender often compensates with an elevated rate. Also, a no-down-payment mortgage doesn’t mean you get the keys to your home without handing over any money. Every buyer needs to budget for closing costs, which typically total between 2% and 5% of the home’s purchase price.
Advantages of a no-down-payment mortgage
By not having to worry about a down payment, you’ll get the benefit of owning a home and beginning to accumulate equity in the property. For example, rather than paying a landlord rent for the next 12 months, you could make 12 mortgage payments that help chip away at the principal balance. Another upside to skipping a down payment is that you’ll be able to keep more money in your bank account for homeownership expenses, such as maintenance, insurance and upkeep.
Types of zero-down mortgages
- VA loans
- USDA loans
- Credit union loans
- Loans for medical professionals
What are the pros and cons of a mortgage with no down payment?
If you’re looking at zero-down home loans, weigh the advantages and drawbacks before choosing this route.
Types of zero-down mortgages
VA loans
The Veterans Affairs loan is a zero-down mortgage option for eligible service members and veterans of the armed forces. The VA loan has 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.
| VA Loan | Benefits | Requirements |
|---|---|---|
| No down payment required | No minimum credit score requirements | No initial down payment |
| 2.15% VA funding fee if no down payment | 1.5% VA funding fee if down payment |
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 Randolph-Brooks Federal Credit Union andhttps://www.nasafcu.com/personal/mortgages-equity/mortgages/mortgage-features/mortgage-options-folder/zerodownUnited 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 healthcare industry, some lenders such as TD Bank and Regions offer zero-down mortgage loans specifically geared toward qualifying medical professionals.
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
- FHA loan
- Fannie Mae HomeReady
- Freddie Mac Home Possible
- 1% down payment programs
FHA loan
If you have a credit score of 580 or higher, you’ll be in the running for an FHA loan with a down payment of 3.5% of the purchase price. FHA loans are 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.
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. This program also currently offers a $2,500 borrower credit, which can help ease the upfront financial burden of buying a home.
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.
1% down payment programs
As more aspiring homeowners have struggled to save in a challenging economy, some lenders have started offering 1% down payment programs. These do exactly what the name implies: Buy a home with 1% of the purchase price. Rocket Mortgage is the biggest name in the mortgage business to offer the option, but plenty of smaller names, such as Union Home Mortgage and American Pacific Mortgage, have launched similar programs.
Frequently Asked Questions
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. 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.
Conclusion
While a no-down-payment mortgage may seem like an attractive option, it’s essential to consider the trade-offs. With a higher interest rate and steeper monthly payments, a zero-down mortgage can be costly in the long run. However, for those who cannot afford a larger down payment, it can be a viable option. It’s crucial to weigh the advantages and drawbacks before making a decision. Research the options available to you and consult with a financial advisor to determine the best choice for your situation.
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