Homebuying is expensive. Is a no money down option right for you?

Homeownership is an important part of financial security. So important that government programs abound to help people without many financial resources become homeowners. Many programs help by lowering down payment requirements. These programs can be very advantageous, but they all come with drawbacks.

In this article, we will cover the best zero-down mortgage options available and who they’re most suitable for. Let’s dig in. 

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Why Do Home Buyers Need a Downpayment?

Most people know that a down payment is expected when you buy a home. The reasons why are many. Down payments give homebuyers a few advantages:

  • Instant equity in the home
  • Better negotiating power
  • (Usually) lower mortgage rates
  • Smaller mortgage

Your down payment shows that you are ready and able to take on the responsibilities of homeownership. While there are many options available to people who cannot afford a down payment, coming up with a small down payment is often less expensive for the buyer. 

What Are My Options for a Zero-Down Mortgage?

There are many options available to people who, for whatever reason, cannot pay for the down payment on their home. Each program is different and has different requirements and limitations for buyers. Review the options carefully to understand which choice, if any, is right for you. 

FHA Loans

While the Federal Housing Administration (FHA) always requires at least 3.5 percent down on a mortgage, there are some ways to get the down payment covered by someone other than yourself. If possible, you can receive the down payment from other people or entities:

  • A friend or relative
  • Your employer
  • A government or non-profit grant program

Borrowers need at least a 580 credit score to qualify for a 3.5 percent down payment. However, people with credit scores as low as 500 can still be eligible with 10 percent down. However, borrowers will need to pay for private mortgage insurance until, with some exceptions, the borrower has 20 percent equity in the home. Additionally, the home purchase price cannot exceed certain limits depending on the location of the house.

FHA loans can be very powerful for borrowers looking for a multi-unit property. In this case, the borrower can live in one unit and rent the other(s).

VA Loans

If you’re a veteran or active-duty service member, you’re in luck. U.S. Department of Veterans Affairs (VA) loans are quite generous. Not only is 100 percent financing available, but also there are no requirements for mortgage insurance. Instead, a one-time VA funding fee of 2.15 percent is worked into the cost of the loan. 

Borrowers need a minimum 620 credit score. However, some options may be available to borrowers with lower credit scores, depending on the mortgage company. 

USDA Loans

Run by the U.S. Department of Agriculture, this option is meant to revitalize rural development. People who are willing to purchase a home in a rural area can find a ton of help through USDA loans. The home must be in a rural area, as defined by the USDA.

Homebuyers need a minimum credit score of at least 600 to qualify, 640 for automatic approval. Homebuyers must also fit within income requirements, as these loans are intended for people making a moderate income or lower:

  • $82,700 maximum income for a family of four or fewer people
  • $109,150 maximum income for a family of five to eight people

As an added bonus, the cost of mortgage insurance is much less, only 0.35 percent, than PMI on conventional home loans

USDA loans are only eligible for non-investment properties. So that means no farms or multi-flat properties. However, a former farm may still be qualified. Additionally, there are structural requirements, like a sound roof and functional heating, that the home must adhere to. 

Should I Get a No Down Payment Mortgage?

There is no universal right or wrong answer. When deciding whether a zero down payment mortgage is right for you, you simply need to be honest about your financial situation and knowledgeable about the effects of your mortgage decision. 

For some, a no down payment mortgage is a great option—especially if you can avoid PMI. But for others, a down payment is a better decision overall. A zero-down mortgage can be costly in the long run, and providing even a small down payment can save thousands over the life of the loan

Alternatives to a Zero-Down Mortgage

Spending a few more months saving for a down payment can save you a lot in interest. During that time, you can also focus on raising your credit score so that when you do apply for a mortgage, you’ll qualify for a lower interest rate

Beyond saving money, you can also look into a down payment loan or down payment assistance programs. A down payment loan is sometimes called a piggyback mortgage and is used in combination with a conventional mortgage. This loan covers the cost of your down payment but comes with a higher interest rate and additional closing costs

Down payment assistance programs are typically run on the state or municipal level. Many cities looking to revitalize its neighborhoods offer generous grants to first-time homebuyers willing to relocate. Some programs come with added bonuses like:

  • Education assistance
  • Tax abatement
  • Remodel/repair assistance

Other Expenses 

Your down payment isn’t the only expense in the home buying process. When you buy a home, several expenses will come up:

  • Closing costs
  • Realtor fees
  • Home inspection costs
  • Moving services
  • Homeowners insurance

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Frequently Asked Questions About Zero-Down Mortgages

Is a conventional loan a better option?

A conventional loan may be a better option for you if you can qualify for a better mortgage. This could mean a lower interest rate or other terms of the loan that make it more advantageous. There is no shortage of mortgage lenders available to you, many of which participate in federal loan programs like Freddie Mac and Fannie Mae. Your best bet is to know your options and the costs associated with each option. 

Should I improve my credit score even if I qualify for a zero-down mortgage?

Your credit score is more than a three-digit number and affects more than your mortgage approval. A better score means better interest rates on your mortgage loan and all other lendings. Your credit score can also affect your employment and the rates you pay for car insurance.  You can get a copy of your credit report for free once per year at AnnualCreditReport.com. You can also monitor your credit score with a tool like Credit Karma. All-in-all, maintaining Good or Excellent credit is very helpful in reaching your financial goals. 

How does private mortgage insurance (PMI) affect my mortgage payment?

If you are required to pay for PMI, you will find that your monthly payments are more expensive. The amount you pay for PMI is determined by a percentage of the loan amount. You can expect to pay anywhere from 0.85 percent to 0.35 percent for PMI.

Conclusion: Real Estate Is An Important Investment

Whatever loan program you decide is right for you, remember that homeownership is part of your personal finance big picture. Your home is part of your retirement plan, whether you’re paying attention or not. For most Americans, their home value plays a huge role in making retirement possible, whether through a reverse mortgage or by selling the home. Choose your path wisely, save when you can, and you will prosper.

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Updated June 19, 2020

J.J. Starr is a financial copywriter and enjoys helping readers find the information they need. In addition to her background in banking and financial advising, she is also a poet with an MFA from New York University. She lives in Amherst, Massachusetts. You can learn more at jjstarrwrites.com.