Saving for a down payment on a home can be challenging, but it doesn’t have to be an impediment to getting a mortgage. Many homebuyers believe they need to put 20 percent down, which just isn’t true. There are no-down payment home loans available, as well as ones with a small down payment, that you might qualify for.
Zero-down mortgage options
If you’re looking for a no-down payment home loan, there are a few options:
1. USDA loan
The U.S. Department of Agriculture (USDA) backs USDA home loans, a mortgage guarantee program for those buying a home in a designated rural area. USDA loans don’t require a down payment, but borrowers must meet credit and income requirements to qualify, and, in some cases, be a first-time homebuyer. Although there’s no down payment with a USDA loan, there is an upfront guarantee fee, which borrowers can add to the cost of the mortgage.
2. VA loan
If you’re a military servicemember, veteran or surviving spouse, you could be eligible for a VA loan backed by the U.S. Department of Veterans Affairs with no money down. There is no mortgage insurance with this type of loan, but like a USDA loan, you do have to pay an upfront funding fee, which can be rolled into the mortgage. Note that you can reduce the funding fee by making a down payment, but no down payment is actually required.
Compare VA loan rates.
3. Navy Federal Credit Union
One of the biggest credit unions, Navy Federal offers a zero-down mortgage option for military members, military families and some civilian employees of the U.S. Department of Defense. This loan also comes with a funding fee, but it’s a flat rate, so it could be less expensive than the VA loan funding fee, depending on your situation.
Low-down payment mortgage options
If you don’t qualify for one of the no-down payment home loans, you might still be able to buy a home with a small down payment. Here are some of the options available:
1. FHA loan
Backed by the Federal Housing Administration, an FHA loan only requires 3.5 percent down. On top of that, it’s possible to be eligible for a low down payment even if you have a credit score as low as 580. Those with credit scores between 500 and 579 can potentially qualify with a 10 percent down payment.
Like other government-insured programs, FHA loans are offered by private mortgage lenders, so you might also have to meet a lender’s criteria in order to qualify. Additionally, you have to pay for FHA mortgage insurance, which adds to your monthly payment and the cost of the loan.
2. HomeReady mortgage
The Fannie Mae HomeReady mortgage, available through many mortgage lenders, is backed by Fannie Mae, a government-sponsored enterprise (GSE). The down payment requirement on a HomeReady loan is 3 percent, which makes it doable for many borrowers. The loan itself offers flexible underwriting, as well. While you’ll have to pay mortgage insurance to compensate for the low down payment, it’s often at a lower price tag than what you might see with a conventional loan.
3. Home Possible mortgage
Backed by Freddie Mac, Home Possible is a similar mortgage program to HomeReady, with a 3 percent down payment requirement. Borrowers do have to pay for mortgage insurance — again, at potentially a lower rate — but also enjoy the same credit flexibilities, making it a viable option for those with limited down payment savings and a lower credit score.
4. Conventional 97 mortgage
A Conventional 97 mortgage is another GSE-backed program, available from Fannie Mae and Freddie Mac, that only requires a 3 percent down payment. One of the advantages of this program is that the down payment can come entirely from gifted funds, so you’re able to get help from relatives or others to make the down payment. As with other low-down payment programs, you do need to be financially prepared to pay for mortgage insurance, however.
5. Piggyback loan
A piggyback loan involves taking out two separate loans: one a conventional mortgage for 80 percent of the home’s value, which is enough to eliminate the need to pay mortgage insurance; and the second for 10 percent of the home’s value. That means you’ll only have to provide the remaining 10 percent down to be able to buy a home without insurance. The drawback of a piggyback loan is that you’re getting two mortgages, which means paying closing costs on both, which can reduce the savings you’re hoping to net with a smaller down payment. The second loan is also likely to have a higher interest rate, and it can be difficult to refinance.
6. Good Neighbor Next Door program
The Good Neighbor Next Door (GNND) program is for borrowers who work in select public service professions and are planning to buy a home in a qualifying area. The program, sponsored by the U.S. Department of Housing and Urban Development, 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. As long as the borrower continues to meet program requirements, the second mortgage won’t have to be repaid.
Pros and cons of zero- and low-down payment mortgages
Before deciding if a zero- or low-down payment mortgage is right for you, carefully consider the benefits and drawbacks:
- 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, especially if you’re in an area where home prices are spiking. Alternatively, if you want to take advantage of a good deal or a dip in the market, you can move fast without having to spend time saving for a down payment.
- You can keep more cash on hand: Even if you have enough to make a sizable down payment, you might want to keep cash on hand for remodeling or to reach some other goal. With a zero- or low-down payment mortgage, that extra cash remains available to you.
- You’ll have no or little equity: When you start with a no-down payment home loan, you don’t have much or any equity in your home at the outset because you’ll owe nearly 100 percent of the home’s value. That means you won’t be able to tap into your equity in an emergency, and during a downturn, you could end up owing more on the home than it’s worth, making it difficult to sell and move if that becomes necessary.
- Your interest rate might be higher: In some cases, you might have to pay a higher mortgage rate for a no- or low-down payment 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 might have to pay extra fees: Some no-down payment home loans come with extra fees, which add to the cost of the loan.
What about down payment assistance programs?
In addition to these no- and low-down payment loan options, there are programs that offer down payment assistance and grants that can be paired with your mortgage. Many of these programs are locally-based, so look to your state or municipal housing authority to explore your options. Also, be sure to check with your employer and any professional organizations you’re part of — some companies or groups offer down payment assistance, as well.
Is paying mortgage insurance worth it?
Paying for private mortgage insurance (PMI) or FHA mortgage insurance in exchange for a lower down payment is often seen as a bad thing because it’s an extra cost every month. However, it’s not necessarily true that paying for insurance is a complete disadvantage. You might not relish the idea of paying it, but if you’re willing to take on the cost, it can get you into a home sooner, and with a lower down payment, leaving more cash available to you.
Plus, PMI can be removed once you reach a loan-to-value ratio of 80 percent. Once you build enough equity, the PMI is removed and the cost disappears. (FHA mortgage insurance can’t be removed unless you refinance.)
Whether you get a zero-down mortgage or save up a down payment of 20 percent — or do something in between — remember to carefully consider what you can reasonably afford. Ultimately, it’s up to you to decide how buying a home fits into your long-term financial goals, and what’s worth it to you.