28/02/2024 12:29 PM


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How To Buy A House With Little Or No Money Down | Personal-finance

For many homebuyers, saving up for a down payment can seem like a massive roadblock, especially with home prices skyrocketing. But there are mortgage options designed specifically for those who can’t save the standard 20% down of the loan amount—or don’t want to wait until they do.

Here are some of the most popular mortgage options that require no down payment or just a little money down so you can achieve homeownership sooner rather than later.

Options for a Mortgage With No Down Payment

The primary way to get a mortgage with no down payment is with a government-backed loan. These loans are insured by the federal government, meaning the lender does not have to take on all of the risk if there is a default that leads to foreclosure. This encourages the lender to provide you with more favorable loan terms. There are several main options for a mortgage with no down payment that are backed by the government.

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1. Veterans Affairs (VA) Loans

VA loans are provided by private lenders such as banks, credit unions and mortgage finance companies, and partially guaranteed by the Department of Veterans Affairs.

VA loans usually have no or low down payment requirements, and lower interest rates than traditional mortgage products. These loans also tend to be more flexible, allowing for a higher debt-to-income (DTI) ratio and lower credit scores, and don’t require private mortgage insurance (PMI).

VA loans don’t require down payments as long as the sales price is at or below the home’s appraised value. The “VA home loan guaranty” is an agreement that the VA will reimburse a lender in the event of loss due to foreclosure—this takes the place of your down payment.

VA Loan Eligibility

To be eligible for a VA loan, you must:

  • Be a veteran, active-duty service member, member of the National Guard, reserve or the surviving spouse of a veteran
  • Have a Certificate of Eligibility (COE) from the VA

Other requirements vary based on whether you’re active duty or a former member of the military, if you served or are serving in the National Guard or Reserve, and when you served. Check out the full list of VA loan eligibility requirements.

2. USDA Loans

The U.S. Department of Agriculture (USDA) provides homeownership opportunities to low- and moderate-income Americans through several loan, grant and loan guarantee programs.

These low-interest, fixed-rate USDA loans are provided directly through USDA Rural Development. Financing is also offered in the form of a loan from a lender and guaranteed by USDA Rural Development for qualified borrowers.

  • Section 502 Direct Loan Program: This program assists those with low and very low income to live in eligible rural areas by providing payment assistance to improve their ability to repay the mortgage—a key metric lenders look at to determine whether to approve a loan. The amount of payment assistance is determined by your income.
  • Section 502 Guaranteed Loan Program: This program works with approved lenders to provide low- and moderate-income households with mortgages to buy homes in eligible rural areas. The program provides a 90% guarantee to approved lenders to reduce the risk of extending 100% loans to eligible rural homebuyers.

Neither of these home loan programs require a down payment, but you must live or plan to live in an eligible rural area to qualify.

USDA Loan Eligibility

In addition to buying in an eligible location, specific USDA loan requirements include:

  • The home you’re buying must be your primary residence
  • You must demonstrate you can manage debt
  • Your DTI ratio must be 41% or lower

Income limits for USDA loans also vary by program and location. For guaranteed loans, your income can’t exceed 115% of the median income for your area. Income limits for direct-issue loans are much lower—as low as 50% of the median income in certain areas.

3. Zero-Down Home Loans With Private Lenders

You don’t have to rely on just government-backed programs to get a mortgage loan with an option for no down payment. Some financial institutions also offer no-money-down mortgages—although they’re not as prevalent as they were before the 2008 financial  crash.

No Down Payment Lender Eligibility

Examples of lenders who offer loans with no down payment include North American Savings Bank and Navy Federal Credit Union. Navy Federal doesn’t require a PMI, but you have to be a member to qualify. NASB only offers this mortgage to borrowers with a credit score of 700 or higher.

If you’re exploring this option, be sure to contact the lender directly to learn more details about their offerings before applying.

Pros and Cons of a No Down Payment Mortgage

While having to put less cash down on a mortgage can seem tempting, there are some things to consider before signing up.

Pros of No Down Payment Loans

  • You don’t have to deplete your cash reserves (or wait until you have saved enough) for a large down payment
  • You don’t have to worry about paying mortgage insurance on top of your loan repayments, in most cases
  • You’ll get more favorable terms from the lender if it’s a government-backed loan

Cons of No Down Payment Loans

  • If the loan is not backed by a government entity, then it will likely come with a higher interest rate
  • The lender will typically charge higher origination and funding fees
  • You typically need a good credit score to be eligible

Options For a Mortgage With Little Money Down

If you don’t qualify for a mortgage with no down payment, there are still a few ways that you can buy a home without having to make a significant down payment upfront. These options can go as low as 3% down.

1. FHA Loans

Federal Housing Administration (FHA) loans are insured by the FHA, which approves certain lenders to offer the product. These loans are meant to help low- and moderate-income borrowers buy homes.

An FHA borrower can qualify with a lower credit score than what’s required for conventional mortgages and buy a home with a smaller down payment compared to other loan options.

Because of this, FHA mortgage interest rates can be somewhat higher.

FHA Loan Requirements

The specific requirements needed to qualify for an FHA loan include:

  • A minimum credit score of 500
  • A down payment of at least 3.5%
  • The home must be your primary residence
  • The home appraisal has to be performed by anFHA-approved appraiser
  • The property inspection must meet the minimum eligibility standards
  • A maximum loan-to-value (LTV) ratio of 96.5% if your credit score is 580 or more; or 90% if your score is under 580
  • A cap on the loan amount, depending on the property type and the cost of living in that area

2. HFA Loans

Another affordable mortgage option is the financial assistance provided by your state’s Housing Finance Agency (HFA), usually in partnership with a local lender. HFA homeownership programs differ by state, but all are aimed at promoting homeownership and increas­ing mortgage affordability for first-time homebuyers as well as low- and moderate-income households.

HFAs provide first-lien mortgage products for eligible borrowers that require very little money down and offer reduced interest rates, as well as down payment and closing cost assis­tance. Once these loans are made, HFAs buy them from the lenders.

3. Other HFA Homeownership Programs

These programs include low interest rate or low (or zero) down payment mortgage products. They also may offer down payment and clos­ing cost assistance as well as mortgage tax credit certificates, which allow you to claim a federal tax credit of 20% to 40% of the mortgage interest you pay each calendar year.

HFAs also offer a grant or a second mortgage loan to cover your down payment and/or closing costs. Most HFAs require that these downpayment assistance programs be used in conjunction with an HFA loan.

4. Fannie Mae’s HomeReady Mortgage

Mortgage giant Fannie Mae offers the HomeReady mortgage product. It allows low income homebuyers to finance up to 97% of their home purchase, meaning you can make down payments as low as 3%. To qualify, you must:

  • Be a low-income borrower
  • Be a first-time or repeat homebuyer
  • Have a credit score of 620 or greater (a score higher than 680 secures better loan terms)
  • Live in the home
  • Take a homeownership education course if you are a first-time homebuyer

5. Freddie Mac’s Home Possible Mortgage

Home Possible is Freddie Mac’s mortgage product for low-income borrowers. Unlike Fannie’s option, you don’t have to make a downpayment. If the mortgage is for a single-unit property, including a manufactured home, borrowers without credit scores may finance up to 95% of the home purchase. To qualify, you must:

  • Earn less than 80% of the median income for your area
  • Use the house as a primary residence
  • Have a minimum credit score of 660 if your lender doesn’t use its automated Loan Product Advisor tool

Pros and Cons of a Low Down Payment Mortgage

It’s important to weigh all your mortgage options before committing to a low down payment loan since other costs could increase to compensate for putting less cash upfront.

Pros of Low Down Payment Loans

  • Putting as little down as 3% means you can afford to buy a house sooner
  • Less money down means more savings available to cover other related expenses like closing costs
  • You’ll have money left over to buy new furniture or to increase your emergency fund

Cons of Low Down Payment Loans

  • You’ll be required to pay PMI (usually until you have built up at least 20% equity)
  • Your interest rate and monthly mortgage payments will be higher
  • You’ll have to pay more in origination and funding fees
  • Since you didn’t put a lot of money down, your house could end up being worth less than what you owe if housing prices fall (negative equity)

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