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How to Buy a House With No Money Down

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You don’t need to put 20% down to buy a home. You can buy a house with no money down by applying for a loan guaranteed by the U.S. Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (USDA). Even if you’re not eligible for these government-backed zero-down loans, you may qualify for homebuyer assistance programs that allow you to cover the cash needed for both your down payment and closing costs.

No-down payment mortgage options

There are two government-backed 0%-down-payment loan options. The VA loan program is specifically for military borrowers, while the USDA loan is aimed at low- to moderate-income borrowers buying homes in designated rural areas.

VA loans

VA loans are only made to active-duty service members, veterans and eligible surviving spouses.  They are guaranteed by the VA and offered by VA-approved lenders. Even with no down payment, you don’t have to pay mortgage insurance, giving you a lower monthly payment compared with other low- or no-down-payment home loan options. An added bonus: The VA removed loan limits, which means VA borrowers can buy higher-priced homes with no down payment.

To buy a house with a no-money-down VA loan you need to:

  • Prove you’re eligible. Provide a certificate of eligibility (COE) showing enough entitlement for zero-down payment financing.
  • Meet the minimum credit score requirement. Although VA guidelines don’t have a set minimum, many VA-approved lenders won’t accept scores less than 620. Technically, the VA does not have a minimum credit score requirement; they ask lenders to look at your entire borrower profile to determine your eligibility.
  • Meet the debt-to-income (DTI) ratio requirement.  Your total debt divided by your gross income, known as your DTI ratio, shouldn’t exceed 41%. However, your lender may approve a higher DTI ratio with compensating factors like mortgage reserves or a higher credit score.
  • Verify you meet the free cash requirement. Also known as the VA residual requirement, this requirement is unique to VA loans and varies based on the home’s square footage, your family size and your home’s location.
  • Buy a home you intend to live in as your primary residence. You can’t buy a second home or investment property with a VA loan. However, you may own more than one property with a VA loan.
  • Pay a funding fee in most cases. Instead of mortgage insurance, the VA charges a VA funding fee to cover the taxpayer cost of the program. The fee is 2.3% of your loan amount on your first no-down-payment mortgage, and 3.6% on subsequent homes unless you’re exempt due to a service-related disability.

USDA loans

The USDA loan program provides low- to moderate-income homebuyers with no-down-payment mortgages to buy homes in USDA-approved rural areas. Although no mortgage insurance is required, eligible borrowers must pay an upfront guarantee fee and an annual guarantee fee that becomes part of the monthly payment.

To buy a house with a no-money-down USDA loan you need to:

  • Prove the total income of all adults in your home. You can use the USDA income eligibility tool to confirm your household income doesn’t exceed 115% of the median income limits for your county and state.
  • Provide evidence of how well you’ve managed credit. The USDA doesn’t set a credit score minimum, but does require you to show you have and will handle your credit payments responsibly. Many lenders have a 640 minimum credit score guideline.
  • Prove your total DTI ratio is no more than 41%. In addition to a maximum total DTI ratio of 41%, USDA caps your monthly payment DTI ratio at 29%. This is calculated by dividing just your expected mortgage payment by your gross income.
  • Buy a primary residence in a designated USDA rural area. You must live in a home purchased with USDA financing as your primary residence.
  • Pay upfront and yearly guarantee fees. The USDA charges borrowers guarantee fees to defray the taxpayer cost of the USDA mortgage program. Current USDA fees include a lump sum guarantee fee of 1% of the loan amount which is usually rolled into the loan amount, and an annual fee of 0.35% of the loan amount, divided by 12 and added to the monthly payment.
THINGS YOU SHOULD KNOW

There are two home loan programs offered by the USDA: the Single-Family Guaranteed Loan Program (SFGLP) and the Single-Family Housing Direct Home Loan (SFHDHL). The SFGLP is offered by USDA-approved lenders, while the USDA Direct Loan program is offered directly through the rural development office.

Down payment assistance loans

If you aren’t eligible for VA or USDA zero-down loans and don’t have the cash for a down payment or closing costs, a down payment assistance (DPA) loan is your next best bet. The U.S. Department of Housing and Urban Development (HUD) provides funds to all 50 states to contribute to down payment programs.

DPA funds can be used to cover the low-down-payment requirements of loans offered by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). For example, the Fannie Mae HomeReady® program only requires a 3% down payment, which could come from a DPA program offered in your area.  There are typically two ways you’ll receive DPA money: as a grant, or as a second mortgage. Here are the basics of how each  works:

  • Grants: A grant is money you don’t have to repay. State and local municipalities offer down payment grants that can be applied to the down payment requirement of the mortgage program you’re approved for. One drawback: Some programs charge higher rates to cover the program costs.
  • Second mortgages: This type of DPA loan is called a “second mortgage” because it’s placed behind your first mortgage as a lien on your home. In some cases, you’ll be required to make regular principal and interest payments, while others are “silent” seconds that don’t need to be repaid as long as you stay in the home for a set time period.

Besides qualifying for the mortgage that’s tied to your DPA loan, you may have to meet specific guidelines that may include:

  • Income limits: DPA programs are set up to help low- to moderate-income borrowers buy homes.  
  • Neighborhood restrictions: Some down payment assistance programs focus on qualified census tracts, which means the funds can only be used to purchase homes in targeted neighborhoods.
  • Length of ownership requirements: Many DPA programs require you to live in the property a certain number of years, or repay the money. 

Doctor loans

Some lenders offer no-down payment programs for medical doctors and dentists, with higher loan limits than standard conventional mortgage programs and no mortgage insurance requirement.

Pros and cons of no-down payment home loans

The biggest benefit of no down payment is that you can buy a home without emptying your bank account. However, a larger loan amount also means a higher monthly payment and closing costs. Because closing costs are about 2% to 6% of your loan amount, the more you borrow, the more you’ll pay. Here’s a breakdown of other no down payment pros and cons worth considering:

Pros Cons
  You’ll leave extra money in the bank

  You can put extra cash into an emergency fund

  You’ll have a financial cushion for unexpected home repairs

  You’ll have a bigger mortgage interest write off if you itemize deductions

  Your mortgage payment will be higher

  You’ll usually pay mortgage insurance

  You won’t have any equity at first

  You’ll pay higher closing costs

  You won’t qualify for as much

Should I get a no-down payment loan?

You should get a no-down payment loan if:

  • You can afford the higher monthly payment. A higher loan amount equals a higher down payment — make sure you leave room in your budget for both regular and unexpected expenses.
  • You don’t plan to sell the home in the near future. Sellers typically pay up to 6% in real estate fees, which means you could end up writing a check if you end up selling your home soon after taking out a zero-down payment mortgage.
  • You’ll benefit from homeownership versus renting. If you’re tired of paying rent and want your monthly housing payment to go toward a home you own, a no-down payment loan may help you accomplish that goal sooner.
  • You have a plan to pay the loan down faster in the future. Home equity can be a powerful financial tool over time, and the quicker you start building it, the better. Consider bi-weekly mortgage payments to help knock down your balance faster.

Low down payment mortgage options

If you don’t qualify for any of the no-down payment options listed above, you may consider low-down-payment mortgage programs. All of the programs listed below allow you to use down payment assistance to meet both the minimum down payment and closing cost requirements of each loan.

Fannie Mae HomeReady loans

You’ll only need a 3% down payment to buy a home through the Fannie Mae HomeReady program. However, check the Fannie Mae lookup tool to make sure your income is within the income limits.

To qualify under Fannie Mae HomeReady guidelines you’ll need to:

  • Have a credit score of at least 620
  • Pay private mortgage insurance (PMI), which may be pricey if you have low credit scores
  • Prove your DTI ratio is 45% or less, although a high credit score or cash reserves may allow up to 50%
  • Buy a home that you plan to live in as your primary residence

Freddie Mac Home Possible loans

With a 3% down payment, you could get a Freddie Mac Home Possible® loan and qualify with the earnings of a co-borrower that doesn’t live in the home. Income limits apply, and the credit score requirements are higher than the Fannie Mae program.

You may qualify for a Freddie Mac Home Possible loan if you:

  • Have a credit score of at least 660
  • Pay PMI
  • Prove your DTI ratio is 43% or less
  • Take a homebuyer education course
  • Buy a home as your primary residence

Conventional 97%

Also called the Fannie Mae Standard 97% loan, this program has no income or neighborhood limitations and only requires a 3% down payment for qualified borrowers. There is a homebuyer education requirement if all of the applicants are first-time homebuyers.

FHA loans

Mortgages insured by the Federal Housing Administration (FHA) require a bigger down payment of 3.5%, but allow for much lower credit scores than other low-down-payment loan programs.

FHA borrowers typically qualify if they:

  • Have a credit score of at least 580 with a 3.5% down payment
  • Have a credit score of 500-579 with a 10% down payment
  • Pay an upfront and annual FHA mortgage insurance premium
  • Have a total DTI ratio of 43% or less, although higher DTI ratios may be approved with compensating factors
  • Borrow up to the maximum FHA loan limit for your area
  • Buy a home as a primary residence

Keep in mind, these are the most popular low-down payment programs. Ask your lender about other first-time homebuyer programs that you might qualify for.

Piggyback loans

If you have 10%, you can try a piggyback loan, which involves getting a home equity loan or home equity line of credit (HELOC) for another 10%. Also known as an 80-10-10 piggyback loan, you’ll avoid mortgage insurance and have a lower total payment than no-down or low-down payment loans.

THINGS YOU SHOULD KNOW

One of the disadvantages of many low down payment programs is having to pay mortgage insurance. Mortgage insurance protects lenders against losses if you default and is required on both conventional and FHA mortgages with less than a 20% down payment. Conventional private mortgage insurance (PMI) can be removed once you have 20% equity in your home. You’ll pay two types of FHA mortgage insurance: MIP and UFMIP. The upfront mortgage insurance premium (UFMIP) is 1.75% of your loan amount financed into the mortgage. The mortgage insurance premium (MIP) is charged yearly, divided by 12 and added to your monthly payment and is paid for the life of your loan if you make a minimum down payment.

FAQs about down payments

Are zero-down mortgages a good idea? If you have a stable job and income and extra rainy day money in the bank, a zero-down mortgage may be a good way to get your feet wet in homeownership.

What is the minimum down payment for a mortgage? No down payment is required for VA, USDA and doctor loan programs detailed above.

What credit score do I need to buy a house with no money down? No-down-payment lenders usually set 620 as the lowest credit score to buy a house. You can boost your credit score by keeping your revolving charge card balances to a minimum and paying all your bills on time.

How do I find down payment assistance programs in my area? Check with local or state housing authorities or local housing nonprofits to learn about homebuying assistance in your area.

Can I use a gift for my down payment or closing costs? All the low-down-payment loan programs outlined above allow for gifts for your down payment, plus closing costs up to a set limit. Check with your employer to see if they offer any homebuying benefits.

Do you have to put 20% down on a conventional loan? No. However, a 20% down payment will help you avoid PMI on a conventional loan, and borrowing less means your monthly payment will be lower.

How can I get money for a down payment on a house? Setting up a down payment fund, using a savings app and setting aside tax refunds, bonuses and commission income over time or getting a side hustle for extra down payment income are just a few ways you can save for a down payment.

How much are lender fees on a no-down payment loan? Mortgage companies typically charge origination fees based on a percentage of your loan amount. For example, a 1% origination fee on a $300,000 loan amount would cost you $3,000.  The higher your loan amount, the higher the lender fee.

 

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