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Key takeaways
- A no-down payment mortgage allows you to buy a home without putting any money down upfront at closing.
- USDA and VA mortgages are two types of loans that don't usually require a down payment.
- Some alternatives to no-down payment mortgages include low-down payment options, such as a conventional or FHA loan, along with using down payment gift money from family or friends.
Buying a home doesn’t necessarily require a large down payment. The conventional wisdom is that you need 20 percent down, but in reality, you don’t have to save that much. In fact, there are no-down payment mortgage options. Here’s what you need to know about these types of loans.
What is a no-down payment mortgage?
A no-down payment mortgage is a home loan that allows you to finance 100 percent of the home’s purchase price without having to put any money down at closing. Zero-down mortgages can be particularly beneficial for those buying a home for the first time or with limited savings.
How to get a mortgage with no money down
The easiest way to avoid a down payment is to qualify for one of the two no-down payment mortgage programs backed by the government: a USDA or a VA loan.
USDA loans
The U.S. Department of Agriculture (USDA) backs USDA home loans, a mortgage guarantee program for those buying a home in designated rural areas. There are many areas you might not consider “rural” that do qualify under USDA guidelines, so be sure to check your eligibility on the USDA website. USDA loans don’t require a down payment, but borrowers must meet credit and income requirements to qualify.
Although there’s no down payment with a USDA loan, there is an upfront guarantee fee of 1 percent of the principal loan amount, as well as an annual fee of 0.35 percent, which borrowers can roll into the cost of the mortgage. While you won’t pay any money initially if you choose to roll these fees into the loan, keep in mind that it adds to the total balance and will accrue interest over the loan term, which means you’ll pay more overall.
VA loans
If you’re a military servicemember, veteran or surviving spouse, you could be eligible for a VA loan guaranteed by the U.S. Department of Veterans Affairs (VA) with no money down. There is no mortgage insurance requirement with this loan. However, like a USDA loan, you do have to pay an upfront funding fee, which can be rolled into the mortgage. The funding fee ranges from 1.25 percent to 3.3 percent of the loan amount. You can reduce the funding fee by making a down payment.
Another perk: VA loan lenders often offer more competitive rates for these products, which helps you save money over the life of the loan.
Alternative zero-down mortgage options
In addition to government-backed loans, you might be able to explore:
- A low-income loan – These are often geared toward first-time or low-income borrowers, or those in specific areas. For example, Bank of America’s zero-down program aims to help buyers in minority neighborhoods.
- A zero-down mortgage through a local credit union – This might be an option especially if the credit union is based on membership in a professional organization. For example, Sunmark Credit Union offers a no-down-payment mortgage option. While these can be relatively rare, it’s still worth looking into.
- Gift money from family or friends – If available, you can use gift funds for your down payment. You’ll need to provide your lender with a gift letter that shows you don’t need to pay back the money gifted.
Low-down payment mortgage options
If you don’t qualify for one of the no-money-down home loan options, you might still be able to buy a home with the next best thing: a low-down payment mortgage.
FHA loans
Insured by the Federal Housing Administration (FHA), an FHA loan requires only 3.5 percent down with a credit score as low as 580. (If you have a credit score between 500 and 579, you might be able to qualify with a higher down payment of 10 percent.) It’s a popular option for homebuyers with less-than-perfect credit and not a lot of savings. Like other government-insured programs, FHA loans are offered by private mortgage lenders, so you might also have to meet a lender’s criteria to qualify. Additionally, you’ll have to pay for FHA mortgage insurance, which adds to your monthly payment and the cost of the loan. You’ll pay these premiums for as long as you have the mortgage, in most cases.
HomeReady mortgage
Available through many mortgage lenders, the HomeReady program is a conventional loan backed by Fannie Mae. The down payment requirement on a HomeReady loan is just 3 percent. While you’ll have to pay mortgage insurance to compensate for the low down payment, it’s often at a lower price tag compared to other conventional loans.
Home Possible mortgage
Backed by Freddie Mac, Home Possible is a similar mortgage program to HomeReady, with a 3 percent down payment and mortgage insurance requirements.
HomeOne mortgage
Freddie Mac also offers a 3 percent down mortgage option for first-time homebuyers who qualify through its HomeOne program. The main difference between this loan program and Freddie’s Home Possible mortgage is that a HomeOne mortgage does not impose income limits.
1 percent down mortgage programs
Some lenders are now offering mortgage programs for borrowers who qualify that only require a 1 percent down payment. Some examples include Rocket Mortgage’s ONE+ program and United Wholesale Mortgage’s Conventional 1% Down program. For these programs, the lender pays 2 percent of the required 3 percent down payment for a HomeReady or Home Possible loan — or up to a maximum contribution that varies by lender and loan size — and you only need to provide 1 percent down.
Conventional 97 mortgage
A Conventional 97 mortgage is another Fannie and Freddie program that only requires a 3 percent down payment. You’ll pay higher mortgage insurance premiums with this type of loan, however.
Good Neighbor Next Door
The Good Neighbor Next Door (GNND) program is for borrowers who work in select public service professions — teachers, firefighters, law enforcement and emergency medical technicians — and are planning to buy a home in a qualifying area.
The program, sponsored by the U.S. Department of Housing and Urban Development (HUD), provides a discount of up to 50 percent on a home with a down payment of just $100. Through the program, the borrower must qualify for a first mortgage, and the discounted portion of the home comes in the form of another loan. If the borrower continues to meet program requirements, the second mortgage won’t have to be repaid.
Pros and cons of a no-down payment mortgage
The ability to buy a home with no or very little money down can be appealing, but there are drawbacks, too.
Pros of no-down payment mortgages
- You can buy a home sooner. When you don’t have to come up with a substantial down payment, it’s easier to buy a home sooner. Alternatively, if you want to take advantage of a good deal or a dip in the market, you can move fast without having to wait for your savings to accumulate.
- You can keep more cash on hand. Even if you have enough to make a sizable down payment, you might want to keep that money liquid for emergency savings, remodeling or investing. Whatever the motive, with a low- or no-down payment mortgage, that extra cash remains available to you — not tied up in real estate.
Cons of no-down payment mortgages
- You’ll have no or little equity. Home equity is the portion of your home’s value not financed by a mortgage. When you start with a low- or zero-down loan, you’ll have little to no equity. If home values fall, you could end up owing more on the home than it’s worth, making it difficult to sell or refinance.
- Your interest rate might be higher. You might pay a higher interest rate for a no- or low-money down loan. That’s because with less money tied up in the home, a mortgage lender might view you as more of a risk. Of course, the higher your interest rate, the more you’ll pay overall.
- You’ll need a bigger mortgage, which translates to higher costs. The less you put down, the more you’ll need to borrow, which means you’ll pay more in interest over the life of the loan.
- You’ll pay fees. Both VA and USDA loans come with fees, which add to the cost of the loan.
- Your offer for a home might not look as compelling. Although the housing market is starting to cool, it’s still competitive in most places around the country. If someone else makes an offer on a house with a large down payment, that buyer might look like a better bet for a smooth transaction in the seller’s eyes.
Should you get a no-down payment mortgage?
Deciding whether to go for a no-down payment mortgage depends largely on your financial circ*mstances and goals. Here are a couple of scenarios when a zero-down mortgage might be a good idea:
- If you don’t have a lot for a down payment and qualify for a no- or low-down option: If you meet the criteria for a low- or no-down payment mortgage option, not having to make a large initial payment can help you get in a home faster and leave more in your pocket to cover closing costs.
- If you can afford to pay higher monthly payments: With a smaller down payment comes a higher loan amount, which means higher monthly payments. If your budget has the room for higher monthly costs, a zero-down mortgage could work.
- If you plan to stay in the home long-term: When you take out a no-down payment mortgage, you’ll still need to pay closing costs and fees. If you decide to sell your home after a few years for a new one, you’ll have to pay these costs again. Weigh whether it makes financial sense to buy now or save up a little longer.
