Saving for a down payment may seem like a daunting task to many home buyers. The good news is that there are plenty of mortgages that require little to no down payments. Here’s what you need to know about buying a home with a small down payment, or no down payment at all.
Pros and Cons of a No Down Payment Mortgage
Before deciding how to buy a house, it’s important to understand the implications and your options when it comes to no down payments.
- Makes it easier to buy: When you don’t have to come up with a huge down payment, it’s easier to buy a home, especially if you’re in an area where home prices are spiking.
- 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-down mortgage, that extra cash remains available to you.
- Buy sooner: With a no down payment loan, you might be able to purchase a home sooner than expected.
- 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. You won’t be able to tap into equity in an emergency.
- Interest rates might be higher: In some cases, you might have to pay a higher mortgage rate because a lender might view you as a higher risk. The higher the interest rate, the higher the cost of the loan.
- You might have to pay extra fees: Some no down payment home loans come with extra funding fees. These add to the cost of the loan.
Zero-down Mortgage Options
If you’re looking for no down payment home loans, there are a few options that can provide you with the ability to get a home without worrying about the down payment. Here are some programs that can help you figure out how to buy a house with no money down.
USDA loans help make owning a home more affordable for those living in eligible rural and suburban areas and with household incomes within the USDA limits, offering 100% financing with reduced mortgage insurance premiums and feature below-market mortgage rates. They’re backed by the U.S. Department of Agriculture, making them more accessible than other loan options. It is one of the most cost-effective home buying programs in the marketplace today.
The VA loan is a no-money-down program available to members of the U.S. military and surviving spouses. VA loan qualifications are available to active duty and honorably discharged service personnel is eligible for the VA program. In addition, homebuyers who have spent at least 6 years in the Reserves or National Guard are eligible, as are spouses of service members killed in the line of duty.
There is no mortgage insurance with a VA loan, but you do have to pay an upfront funding fee. You can reduce the funding fee by making a down payment, but no down payment is actually needed.
Low Down Payment 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 if you can afford to put a small amount down.
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 this 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-backed programs, an FHA loan is offered by private lenders, so you have to meet their criteria in order to get a loan and qualify for the best mortgage down payment rates.
This mortgage is available from many lenders and is backed by Fannie Mae. The mortgage down payment requirement is 3 percent, which makes it doable for many families, even if they can’t get a zero-down mortgage.
The HomeReady mortgage allows you to use the income of everybody living in the home to get mortgage-qualified and approved. For example, if you are a homeowner living with your parents, and your parents earn an income, you can use their income to help you qualify.
HomeReady offers flexible underwriting requirements, and, while you have to pay mortgage insurance when you get one of these loans, it’s often lower than you might see with other conventional loans.
Conventional 97 Mortgage
The Conventional 97 program is available from Fannie Mae and Freddie Mac. It’s a 3 percent down payment program and, for many home buyers, it’s a less-expensive option as compared to an FHA loan.
In addition, this mortgage allows for its entire three percent down payment to come from gifted funds, so long as the gifter is related by blood or marriage; or via legal guardianship or domestic partnership; or is a fiance/fiancee.