How to Buy a House with No Money Down
One of the biggest roadblocks to homeownership is the down payment. After the financial collapse of 2008, many banks and mortgage companies tightened their lending guidelines, which included requiring borrowers to make larger down payments. Some banks required as much as 20 percent down, which resulted in borrowers needing tens of thousands of dollars upfront to buy a home. However, as the U.S. economy continues to strengthen, many lenders are loosening their guidelines.
For example, Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy mortgages from lenders, raised their maximum debt-to-income requirement to 50 percent from 43 percent in July 2017. Additionally, many banks and mortgage lenders are making more no-down payment and low-down payment loans available to consumers.
Remember, though, that banks and other lenders aren’t going to come banging on your door offering low- and no-down payment mortgages. You have to remain realistic in your search for a no down payment mortgage. They’re not easy to find, which is why we’re offering this guide to help you buy a house with no money down.
Can you buy a house with no money down?
If you want to buy a house, but think you don’t have enough saved for the down payment, your dream of owning a home is still possible. Programs exist that require very little money up front, and in some cases there’s no down payment requirement. Keep in mind that banks and mortgage lenders consider many factors other than the down payment — such as income, credit score and debt-to-income ratio — before accepting or declining your application.
However, you will have to search for the ideal loan program, and below we’ll cover several programs that require down payments as low as 3 percent and in some cases no money at all.
Zero down and low down payment home loan programs
To find zero down payment home loans, you have to look in places that you normally wouldn’t think offer loans with no money down. For example, when most Americans think of the United States Department of Agriculture (USDA), they think of farming. However, the agency has home loan programs for low-income Americans in rural communities with no down payment requirement.
Although many veterans are familiar with the Department of Veterans Affairs, they’re often not aware the VA provides no down payment home loan programs. The VA also offers mortgage programs with a cap on the total fees lenders can charge. It can be a confusing process, but a little guidance goes a long way in the mortgage industry. We’ll start with a few programs offered by both agencies.
|Zero down and low down payment home loan programs|
|Program||Minimum Down Payment||Credit and Income Requirements||Fees|
Single Family Housing Direct Home Loans
|$0||No minimum credit score
Income: Use the USDA’s income tool to determine eligibility
|3.75 percent fixed interest rate, can be reduced to 1 percent when modifying a loan|
|USDA Single Family Housing Guaranteed Loan Program||$0||No minimum credit score
Income: Up to 115 percent of the area median income
|Reasonable and customary lending fees, which can be financed|
|VA||$0||No specific credit score or income limit outlined by the VA||2.15 percent for first-time use, 3.3 percent for each subsequent use|
|Good Neighbor Next Door||Earnest money deposit of 1 percent of the loan amount, but not less than $500 or more than $2,000||FHA Loan: 500
VA Loan: No minimum score
Conventional loan: At lender’s discretion
|Any applicable lender closing costs/fees.|
Single Family Housing Direct Home Loans. This direct loan program offered by the USDA helps low-income Americans purchase, renovate, build or improve homes by providing payment assistance. Also known as Section 502 Home Loans, this program has no down payment or credit score requirement. Notably, this program is a direct loan — the USDA refers to the program as payment assistance — and not a traditional mortgage. The interest rate is fixed at 3.75 percent and the loan terms can range from 33 to 38 years.
However, anyone applying for this program must be without a safe and sanitary home. Applicants must also live in a rural area with populations that are less than 35,000. The USDA provides a website to see if you meet the property and income requirements.
Single Family Housing Guaranteed Loan Program. This program helps low-income borrowers in rural areas own a home with no down payment. The USDA backs 90 percent of the loan amount provided by a qualified lender, which helps borrowers obtain up to 100 percent financing.
Keep in mind that the USDA does not provide the loan, but insures 90 percent of the loan in case of default. The USDA is also very strict with its income eligibility, and your income can’t exceed 115 percent of the area’s median income. You can use the tool provided above to determine your income eligibility based on your location.
As a veteran of the United States Armed Forces, the Department of Veterans Affairs provides you with an opportunity to buy a home with little or no money down. VA loans don’t have a mortgage insurance requirement, and the department limits how much lenders can charge you in closing costs.
If you borrow less than the national conforming loan limit of $453,100 (established by the FHFA) for most areas, you won’t need to make a down payment on a VA-backed loan. However, if you borrow more than the loan limit for your area, you’ll have to make up the difference in the form of a down payment. Understand that conforming loan limits aren’t the same in every location. The VA uses national conforming loan limits as a benchmark to determine how much risk the department is willing to take on mortgage loans — it is not a cap on how much money you can borrow.
Good Neighbor Next Door
This program offered by the USDA helps police officers, firefighters, teachers and EMTs buy a home in a HUD-approved revitalization area at 50 percent off the sales price. Participants must sign a second mortgage note to receive the discount, but there are no interest or monthly payments due on the second mortgage.
Participants must also agree to live in the property as a primary residence for three years to receive the discount. The USDA requires an earnest money deposit of 1 percent of the loan amount. Borrowers must find traditional mortgage financing through the FHA, VA or a conventional loan. Scores and income are based on the type of mortgage the participant chooses.
|3%-5% down payment mortgages|
|Program||Down Payment||Credit and Income Requirements||Fees|
Income: No limit
|Upfront mortgage insurance premium of 1.75 percent of the base loan amount, plus any applicable lender fees|
|5 percent||Minimum 660 credit score on one-unit properties (fixed-rate loans only)
Minimum 680 credit score on one-unit properties (adjustable-rate mortgages only)
Minimum 700 for 2- to 4-unit homes, 720 for manufactured homes
Income: Cannot exceed 100 percent of the area’s median income (AMI)
|Maximum credit fee of 1.5 percent and any applicable lender fees|
|Freddie Mac Home Possible Advantage||3 percent||Minimum 660 credit score on one-unit properties (fixed-rate and purchase loans only)
Income: Cannot exceed 100 percent of the area median income (AMI); no income restrictions in low income census tracts
|Maximum credit fee of 1.5 percent and any applicable lender fees|
|Fannie Mae HomeReady||3 percent||Minimum credit score of 620
Income:100 percent of area median income (AMI); no income limit in low-income tracts
|Maximum loan level price adjustment (LLPA) of 1.5% and any applicable lender fees|
Federal Housing Administration (FHA)
The FHA is an agency within the Department of Housing and Urban Development, and it offers several different home loan programs. However, the most prominent FHA program is the 203(b) Mortgage Insurance Program. Although you can purchase or refinance a mortgage using the program, we’ll focus on purchase transactions and the down payment requirements.
The bottom line with FHA loans is you need a minimum credit score of 500 to qualify. If your credit score ranges from 500 to 579, you can expect to make a minimum 10 percent down payment; if your score is 580 or above, you may qualify for a minimum down payment of 3.5 percent. If you have a relatively good credit score but limited cash reserves for a down payment, this program might help.
It is important to note that the FHA only insures the loan in case you default on your mortgage payments; the agency doesn’t provide the actual loan. Instead, it works with approved lenders, and these lenders can set their own requirements.
According to Brian Sullivan, HUD’s supervisory public affairs specialist, HUD and the FHA set their own standards to insure mortgages, but lenders can add their own requirements as well.
“However, lenders have ‘credit overlays’ that are put on top of our standards, and that can make it harder to get an approval for an FHA-insured loan, especially if your score is below 580,” Sullivan said.
Home Possible Mortgages. Freddie Mac, one of the two government-sponsored agencies discussed earlier, offers mortgage programs for borrowers with low incomes and limited resources. The agency offers two programs that fall under the umbrella of Home Possible Mortgages: The traditional Home Possible Mortgage and the Home Possible Advantage Mortgage.
- The Home Possible Mortgage Program. This program helps low-income borrowers who are first-time homebuyers or repeat borrowers. The maximum loan-to-value (LTV) ratio for this program is 95 percent, so you’ll need a minimum down payment of 5 percent. If your LTV is greater than 90 percent, Freddie Mac will reduce your mortgage insurance requirements. The minimum credit score for this program is 660 for single-family, fixed-rate mortgages.
- The Home Possible Advantage Mortgage Program. Freddie Mac’s Home Possible Advantage is a spinoff of the Home Possible program. Because many well-qualified borrowers with low incomes can’t come up with a 5 percent down payment, the Advantage program helps those borrowers with down payments as low as 3 percent. However, fixed-rate mortgages are only allowed using this program, and the minimum credit score is 660. Both programs allow you to cancel your mortgage insurance obligation after you’ve built 20 percent equity in your home.
HomeReady Mortgage. Fannie Mae, the other government-sponsored enterprise that buys mortgages from lenders, offers a home loan program with lower down payment and credit score requirements. Known as the HomeReady program, Fannie Mae provides you with the opportunity to own a home with as little as 3 percent down and credit scores as low as 620. The program also offers competitive interest rates when compared to traditional loans.
The goal of the program is to help creditworthy borrowers with limited cash reserves buy a home. Additionally, the program lets you cancel your mortgage insurance after you’ve built up 20 percent in equity, and there is no minimum requirement for using your personal funds toward the 3 percent down payment.
Advantages to buying a house with no money down
The obvious benefit to buying a home with no money down is it makes homeownership accessible to people with limited cash reserves. You may be a well-qualified home buyer with good credit, but just can’t quite come up with a significant down payment. It could take many years for you to save up for a down payment, and a no money down mortgage will keep you from waiting years before you can buy a home.
The reality of mortgage lending and the home buying process is that lenders often use strong credit scores, low debt-to-income ratios and steady incomes as the benchmark for your readiness to repay a mortgage. As we discussed earlier, your ability to make a significant down payment is not necessarily an indicator of your capacity to repay a loan.
Disadvantages to buying a house with no money down
Unfortunately, when you buy a house with little or no money down, you can expect to pay a higher interest rate and more closing costs. Although you can roll many of the closing costs into your principal balance, it increases the amount of interest you’ll pay over the life of your loan. Remember, though, that having little money to put down on a home purchase isn’t a deal breaker.
Another consideration is that a zero down mortgage could hurt you if the market starts to decline. For example, if home values start to fall, and you put little or no money down when you bought your home, you could wind up owing more on your house than it is worth. When you make a down payment on a home, you create instant equity — if you have no equity in a declining market, you could find yourself “underwater” (owing more than the value) on your mortgage.
The National Association of Realtors completed a home buyer profile in February 2017 that revealed some interesting information regarding down payments: 39 percent of respondents who didn’t own a home thought they needed a minimum of 20 percent down before they could buy a home. Twenty-six percent thought they needed 15 to 20 percent, while another 22 percent thought they needed 10 to 14 percent down.
The 20 percent figure has been a long running myth in the mortgage industry — but although you’ll receive more favorable terms by making a down payment, it is not a requirement. Millions of homeowners across the country have benefited from low- and no-down payment mortgages. Although the majority of mortgages available on the market today require some form of down payment, lenders don’t use your ability to make a down payment as a primary reason for approving or denying your loan application.