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How to Buy a House with Low or No Down Payment

Buying a home is often described as achieving a piece of the American dream. It can represent stability and safety. A home also comes with responsibilities and obligations. The financial obligation and requirements present in obtaining a mortgage can make it seem like an unrealistic feat. This is where a no money down home loan can be used. Several programs help get a home with no money down or a low down payment. Buying a house without a down payment also has drawbacks. A Financial Guide can help support your decisions and research in the home buying process.

Can I get a home loan without a down payment?

Yes, it is possible to buy a house with no down payment. Various programs exist to help make homeownership a reality. Each program has rules and requirements on how to qualify as a borrower on a zero money down mortgage. Although no money mortgage programs can help, borrowers should ensure that they managing risks and are not being hurt in the process. Maintaining financial stability, managing your money, keeping good financial habits to avoid the negative consequences of missed mortgage payments, and maintaining a home are additional important considerations in this process. A no down payment home is possible.

How to buy a house with no money down?

Homeownership can enhance the lives of individuals and families. As such, a no money down home loan can make homeownership a reality for those who cannot afford one under traditional circumstances and normal lender requirements. Meeting the qualifying criteria of specific programs opens up ways to buy a house with no money. A no money down home loan is typically offered through federal and state programs. Private lenders also participate in no money down home loans.

VA Home Loans

The US Department of Veterans Affairs, known as the VA offers military-connected individuals such as Servicemembers, Veterans, and some surviving spouses opportunities to participate in their no money down home loan program. The loans are made available by private lenders, however, the VA acts as a guarantor on these loans. The VA home loan guaranty means that if a borrower defaults on a loan, the VA will then pay the debt to the lender. The VA assumes a level of risk as a guarantor. Certain eligibility criteria exist to use this program and borrowers must obtain a Certificate of Eligibility (COE). A funding fee is normally applied to these loans but certain conditions may eliminate it.

USDA/RHS Home Loans

Another federal entity involved in making homeownership more accessible through a no money mortgage is the US Department of Agriculture (USDA). These loans are available in some rural areas as outlined by the USDA. Loans are backed/guaranteed by the USDA. Borrowers are normally low to moderate income. Some of the usual financial standards for homeownership eligibility still stand. A borrower's income, credit, and debt ratios are a part of the consideration and approval process when buying a house without a down payment. The USDA no money down home loan offers lower than average mortgage interest rates as loans are backed by a federal entity.

Zero-down loans with private lenders

Private entities also offer no money down mortgages. These lenders are often referred to as hard money lenders. Unlike the guarantee that is offered by other programs, borrowers will usually have to secure their loan with other assets and collateral. 

Pros and cons of a zero down payment mortgage

Homeownership means participation in a major transaction that can yield tremendous returns and benefits. A zero money down mortgage helps some individuals and families participate in this type of economy. The real risks and potential fallout of a no money down home loan should also be evaluated. 

The benefits/pros of no down payment programs include:

  • The ability to preserve cash resources for other contingencies or goals.
  • Obtaining lower interest rates and other favorable provisions not available to traditional borrowers. 

The disadvantages/cons of no down payment loans include:

  • Some of the traditional financial requirements of having a high enough credit score and debt to income ratio can still apply.
  • Higher fees and interest rates.
  • No immediate home equity.

How to buy a house with little money down?

Homeownership opportunities can be maximized with the right guidance and program support. Let’s explore some of them:

Conventional Loans with PMI

Conventional loans account for a large percentage of existing mortgage loans. These loans are not backed or guaranteed by a government agency and are a common way that the goal of homeownership is achieved. A borrower who is unable to make a twenty percent down payment on a home with a conventional loan will need to acquire Private Mortgage Insurance, also called PMI. This insurance serves as a guarantee and helps protect the lender if a borrower stops making payments on the loan. PMI is normally paid in monthly premiums, but upfront premiums can be required. Obtaining a mortgage loan without PMI can mean that the loan interest rate is much higher. PMI premiums can be eliminated when a home’s equity reaches twenty percent. 

FHA loans

Federal support for home ownership is delivered by allowing borrowers to access to Federal Housing Administration (FHA) loans. These loans are made by approved lenders and are guaranteed by the government. FHA loans are prevalent in many first-time homeowner programs and are intended to help low to moderate income borrowers achieve home ownership. Because these borrowers may have a high credit risk, they usually pay higher interest rates for their loans. Downpayment for a FHA loan can be a low as 3.5% making them attractive to borrowers who need help getting a loan with no money. Borrowing limits, credit score requirements, appraisals, and inspections are also part of the FHA home loan approval process.

HFA Loans

Housing Finance Agency (HFA) loans are offered through State housing finance authorities. State HFA’s are non-profit and state chartered agencies that exist to address and support local community development. These groups provide downpayment and closing assistance in many first time home buyer programs. HFA loans offer low downpayment options as low as 3% of the home price. Meeting the income and credit score requirements are important qualifiers for HFA programs. Debt to income ratios are measured, as well as, the ability to comfortably meet mortgage payment obligations. Borrowers must also use the property as their primary residence.

Fannie Mae’s HomeReady Mortgage

Fannie Mae stewards several programs to help borrowers attain homeownership. The HomeReady Mortgage program is intended to be used by low income individuals and offers both first time and repeat homebuyers the opportunity to purchase a home with a low down payment of 3%. Co-borrowers who do not reside on the property can help a family applicant qualify for a HomeReady mortgage. The HomeReady program requires that borrowers participate in homeownership education programs but some exceptions exist. 

Freddie Mac’s Home Possible Mortgage

This program makes homeownership achievable with as low as a 3% down payment. Buyers can be first-time home owners or repeat buyers. Some non-traditional sources of income may be considered as qualifying income criteria, such as rental income in a shared space. A homeownership education requirement exist, as well as, some flexibility in who can be co-borrowers. Credit scores at 620 are permitted, but this limit can change annually. Special populations such as public servants (police officers, firefighters, etc.) can use this program.

Pros and cons of a low down payment mortgage

Buying a house with a low down payment should be carefully examined as there are potential negative consequences with using a low money down approach. Although low money down home loans can be an immediate advantage for borrowers who do not have significant funds saved - low money down mortgage programs can present other challenges, penalties and costs. 

The pros and benefits of a low down payment mortgage loan include:

  • Preserving your savings for other opportunities, goals and expenses that will come up. 
  • Realizing your goal/dream or home ownership sooner.

The cons and downsides of a low down payment mortgage loans include:

  • Being underwater/upside down on your mortgage since little to no equity exists.
  • Paying additional monthly fees for Private Mortgage Insurance (PMI) until the home has built up enough equity.
  • Passing up lower mortgage payments since a higher downpayment results in lower monthly payments.
  • Higher origination and funding fees.

Frequently asked questions

What credit score is required for a no-downpayment home purchase?

Although the credit score requirements will vary by lender and program type. A 620 credit score is the typical lower limit to buy a house with no money down. However, some programs do not have a fixed credit score requirement.

What is the minimum down payment for a mortgage?

Downpayments can be as low as three percent. Speciality programs offer zero money down mortgages. 

Can I use a cash gift as a down payment?

Cash gifts can be used as a downpayment. It is important to consult with your lender on the restrictions that exist. Cash gifts may need to come from a family member and be paid and tracked in a specific manner.

What are the lender fees for a loan with no down payment?

A no money down home loan will always have fees associated with the underlying mortgage loan. Loan origination fees, agency funding fees, and annual fees are some examples. These fees are typically represented as a percentage of the loan amount.

What’s Possible is Not Always What’s Best

No money down home loan programs and opportunities can be alluring as they present opportunities to alleviate hurdles in the home acquisition process. A home purchase can represent the largest financial transaction that we enter. As such it should be entered into with care, consideration, and prudence. This means that you should get objective guidance on the state of your finances, form a team of professional allies, and understand the inner workings of any programs you choose.