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Becoming a homeowner doesn’t necessarily require a large down payment. The conventional wisdom is that buyers need 20 percent down, but there are options to help you get the keys without giving up every dollar of your savings. Or mighty few ones, at least.
Admittedly, true no-money-down home loans aren’t as common as they once were, back in the early 2000s. The subprime mortgage crisis of 2007 pretty much eliminated them. Still, options do exist — along with the next best thing, a low-down-payment mortgage.
How to get a mortgage with no money down: zero-down payment mortgages
Don’t want to come up with a down payment? The easiest way to avoid one is to qualify for one of the two no-down-payment mortgage programs backed by the government: USDA and VA loans.
- USDA loans – As the name suggests, the 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. You can verify your eligibility for these no-money-down home loans via the USDA website. Although there’s no down payment with a USDA loan, there is an upfront guarantee fee, which borrowers can roll into the cost of the mortgage. While you won’t pay any money initially if you choose to roll it into the loan, keep in mind that it adds to the 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 backed by the VA 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 (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 quite a bit of money over the life of the loan.
In addition to government-backed loans, you may be able to explore:
- a commercial lender’s initiative, which are often geared towards building communities and helping credit- or income-challenged borrowers. For example, Bank of America’s zero-down program aims to help buyers purchase property in minority neighborhoods.
- a zero-down mortgage through your local credit union, especially if it’s one based on membership in a professional organization. These are relatively rare but are worth looking into.
Finally, don’t be too proud to ask family or friends for help. Many lenders allow you to use gift funds from a relative — and in some cases, a close friend, labor union or an employer — for your down payment. You’ll need to provide a letter from the source of the gift that shows you don’t need to pay the money back.
Low-down payment mortgage options
If you don’t qualify for one of the no-down-payment mortgage options, you might still be able to buy a home with the next best thing: a low-down-payment mortgage. Here are some of the options available:
- FHA loans – Backed 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 less-than-plump savings accounts. 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 have to pay for FHA mortgage insurance, which adds to your monthly payment and the cost of the loan.
- HomeReady mortgage – Available through many mortgage lenders, this loan is backed by Fannie Mae. The down payment requirement on a HomeReady loan is 3 percent, and the loan itself offers flexible underwriting. 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.
- 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.
- Conventional 97 mortgage – A Conventional 97 mortgage is another government-sponsored entity (GSE)-backed program, available from Fannie Mae and Freddie Mac, that only requires a 3 percent down payment. But while it gives you a break on the cash-down, it — like most conventional (i.e., non-government) loans, does require a higher credit score: 620 at least. Also, as with other low-down-payment mortgage programs, you need to be financially prepared to pay for mortgage insurance each month.
- 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, 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 that money liquid for savings, remodeling or even investing. Whatever the motive, with a low-down-payment 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 equals how much home you own outright: the amount you coughed up cash for. So, when you start with a low- or zero-down mortgage, your equity stake is near or at zilch, because you financed 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 in the real estate market, 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. In some cases, you might have to pay a higher interest rate for no-money-down home loans or ones with lower down payments. 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.
- 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.
- You might incur extra fees. Some no-down-payment mortgage loans come with extra fees, which add to the cost of the loan.
Bottom line on no or low-down payment mortgages
As home prices and interest rates rise, hitting that oft-quoted 20 percent down payment is becoming increasingly difficult for many homebuyers. Don’t let the need for a huge sum of money discourage you from trying to own a home. There are a range of programs that can help you buy a home with no money down or just a fraction of the purchase price. Compare all your loan options, and, more importantly, compare multiple lenders (there are those that specialize in low-down-payment loans). By shopping around, you’ll be able to land the best deal that makes sense with your savings and budget.
FAQs about no or low-down payment mortgages
- Calculate your budget. When you’re applying for a mortgage, lenders will take a deep look at your finances, so determine how much house you can realistically afford. Once you have an idea of your monthly budget, you can do the math to figure out your target goal for a down payment.
- Cut costs everywhere possible. Saving money isn’t just about earning more; it’s about spending less. As you start growing a down payment fund, scrutinize your monthly spending and think about how to shrink some expenses. Can you stop buying coffee each morning? How much can you save if you stop eating out and only cook at home? Even if you’re on a tight budget, you can still identify ways to save.
- Consider adjusting your other financial goals in the short term. If you’re 25 and want to buy a home, for example, consider reducing or pressing pause on your on your 401(k) or IRA contributions to shift those dollars toward your goal. Just remember that once you move in, you’ll want to focus on catching up on your retirement savings as soon as possible.
- Find savings matching programs. Saving for a down payment doesn’t have to all fall on your shoulders. Some mortgage lenders such as Lower offer a boost that matches your savings up to a certain dollar amount. There are also some dollar-matching programs through state housing finance agencies.
- Make sure your savings are also earning. While you’ll be hard-pressed to find a lucrative interest rate on a no-risk savings account, there are banks and credit unions that pay an above-average yield on your deposits. You could also consider money market funds that, while not insured, are pretty low-risk and liquid — and tend to pay a bit more interest than bank accounts.
There are down payment assistance programs in all 50 states. Some programs are available for particular counties or cities and some are limited to special populations like nurses or school teachers. Most are restricted to first time homebuyers and have income restrictions but income limits are higher in areas with higher housing costs.
If you’re trying to figure out how to buy a house with no money down and bad credit, you’re going to have a difficult time. While FHA loans are specifically geared toward borrowers with less-than-stellar credit, the worse your score, the more money you’ll need to put down. Generally, you’ll need to show a mortgage lender you’re not a risky proposition by either strengthening your credit score or saving up for and offering a larger down payment.
Bottom line on no-down-payment mortgages
As home prices rise, hitting that oft-quoted 20 percent down payment is becoming increasingly difficult for many homebuyers. Don’t let the need for a huge sum of money discourage you from trying to own a home. There are a range of programs that can help you buy a home with no money down or just a fraction of the purchase price. Compare all your loan options, and, more importantly, compare multiple lenders. By comparison-shopping for a mortgage, you’ll be able to land the best deal that makes sense with your savings and budget.
Additional reporting by Kacie Goff