How to Buy a House with No Money Down
Point of Interest:
A zero down payment mortgage may be the right answer for you to begin your homeownership journey. They’re designed for low income buyers to have a real chance of owning their own homes, and these loans can be a fantastic way to start your journey into homeownership. However, make sure that your finances are ready to take on the costs of owning a home past the down payment.
Buying a house has traditionally been high on the to-do list for Americans. It’s a key part of the American dream and has long been a marker of adulthood.
However, over the last decade in the United States, housing prices have surged, making a home of one’s own hard to reach. 2018 college graduates carry an average of $29,800 in student loans, and consumer debt in the US passed $4 trillion in 2019.
Coming up with a down payment has kept a lot of people out of the housing market. For people who want a home to call their own but are short on cash, there is an option: a no down payment mortgage, which mean you’ll be buying a house with no money down.
What is a no down payment mortgage?
A no down payment mortgage is exactly what it sounds like: a financial institution offers you a loan for a home and it doesn’t require you to make a down payment to secure it.
Maybe your ears are perking up, but don’t go planning for this scenario just yet. Buying a house with no money saved isn’t as easy as riding a bike. These types of programs come with certain restrictions and requirements. They are usually aimed at a specific group of people, so not everyone is eligible. Some are no down payment first time home buyer programs, while others may vary on the restrictions.
How to buy a home with no down payment
Buying a home without a down payment requires finding a mortgage you qualify for, applying and then being approved by the lender. It works just like a regular mortgage application, only you will be applying for a specific no down payment program.
You are also responsible for meeting the criteria for the loan. That may mean you have to have a certain income level, be buying a house in a certain area or have a certain credit score. The requirements will vary by lender, so it’s important to shop around and find a lender whose requirements fit what you are offering and also find an option that works best for your needs.
Learn about mortgage rates to apply for a loan.
Is buying a home with no down payment right for me?
There are several things to consider before you buy a home with no down payment.
First, consider how long you’ll live there. Since you have no equity in the home, the longer you stay put and make mortgage payments, the better chance you have to make money in a sale.
You should also consider whether you have the money to pay the mortgage, taxes, insurance and any repairs that a house will come with. If saving is truly difficult for you, do you have the income to support the extra costs that come with owning a house?
It’s also important to consider that it may take you longer to pay off the house since you started your home ownership journey with no equity. That could easily mean you end up paying more in interest than you would if you had put money down on the home. Crunch the numbers for different interest scenarios to see if it makes sense for you.
Types of loans with no or low down payments
What types of loans allow potential homebuyers to get a loan without a down payment?
Single-Family Housing Direct Home Loans
Also referred to as the Section 502 Direct Loan Program, this loan program is offered by the USDA to help “low- and very-low-income applicants obtain decent, safe and sanitary housing in eligible rural areas by providing payment assistance to increase an applicant’s repayment ability.” A rural area is defined as having 35,000 people or less.
The loan works by lowering the amount of your mortgage payments for a set period. The amount that each family is eligible for is determined by the adjusted gross income listed on tax returns. Low income levels can vary by area, so a low income level in Indiana may not be the same as a low income level in Northern California.
There are other restrictions on who can apply for these types of no down payment loans, according to the USDA website:
- Be without decent, safe and sanitary housing
- Be unable to obtain a loan from other resources on terms and conditions that can reasonably be expected to meet
- Agree to occupy the property as your primary residence
- Have the legal capacity to incur a loan obligation
- Meet citizenship or eligible noncitizen requirements
- Not be suspended or debarred from participation in federal programs
- Properties financed with direct loan funds must:
- Generally, be 2,000 square feet or less
- Not have market value in excess of the applicable area loan limit
- Not have in-ground swimming pools
- Not be designed for income-producing activities
VA mortgage loans can be obtained with no down payment, and buyers won’t be required to pay for private mortgage insurance like they would with other types of government-backed or conventional home loans. VA loans are available to anyone who has or is currently serving in the armed forces who will be living in the home after they apply for and are granted the VA’s certificate of eligibility. These loans do come with a VA funding fee. If you’re a first time VA loan borrower, the funding fee is 2.3% if you put no money down. The fee is reduced if you do put money down, though. For example, the funding fee is 1.65% with a 5% down payment.
The mortgage is backed by the VA but provided through a traditional lender, and the lender might have a credit score requirement to qualify for the loan with a down payment or otherwise. You’ll still have to meet this and other requirements from the lender to get approved for the loan.
Some credit unions offer no down payment mortgages as one of their mortgage options. Each credit union may have their own rules on how the no down payment mortgages work, along with credit score requirements and fees. For example, East Coast Credit Union offers a no down payment mortgage where the down payment is lumped into the mortgage loan amount. Sometimes to qualify for these loans, you must be a member of the credit union.