If you want to become a first-time homeowner but feel unsure about whether you can put a large amount of money toward the down payment, the good news is that you have several options that can make buying a home accessible to you. You can find government-backed home loans that won't require a down payment as well as various programs that provide you with funds toward a down payment for other mortgage programs. Take a look at what you should know about buying a house with no money down.
Read More: What Is the Meaning of Home Loan?
Home-Buying Process Basics
When it comes to buying a home, you have options to either purchase an existing one or have a new home built. You can work with a real estate agent to find a home that fits your budget and preferences, but you can also look for yourself through real estate listings online. You can also search websites for home builders if you're interested in new builds in your area. But before offering to purchase any home or possibly even before starting the search, you need to get your finances in order and understand how the cost and future mortgage will affect your budget.
If you finance your house with a mortgage, there are several items that make up the monthly payment and can vary by property, loan and borrower. These can include the loan principal, interest charge, private mortgage insurance (PMI) or guarantee fees, property taxes and homeowner's insurance. The interest rate is a particularly important mortgage term that varies based on factors like your credit score, market conditions, loan terms and down payment amount. Mortgage rates can remain constant or can adjust at certain intervals.
The home-buying process also requires thinking about the upfront costs that generally include earnest money, closing costs and your down payment. Earnest money serves as a deposit for a home offer and can go toward the down payment or closing costs later, while a down payment is applied to the home purchase cost. Closing costs, which can reach 5 percent of the home's price, can include many things ranging from prepaid interest, fees and taxes to charges related to real estate transactions, the loan and home inspections and appraisals.
Read More: 5 Requirements to Buy a House
The Basics of Down Payments
When you make a down payment, those funds go toward the home purchase price so that you can reduce the total mortgage loan amount. A down payment helps you in that it helps reduce the total interest since you can take out a smaller mortgage than you would with no money down. The down payment also has an impact on your loan-to-value ratio – the loan amount divided by the home value – that lenders consider when determining whether to qualify you for a mortgage, as the down payment will increase your equity in the home.
The most common suggestion for a down payment amount is 20 percent since this can offer significant savings in interest paid as well as help you avoid the need for PMI that often comes as a requirement for mortgage programs. However, you can find some popular loan options with down payments of 3 to 5 percent if you have less cash available. Even better, you can avoid a down payment altogether either through government-backed mortgage programs, down payment assistance programs or funds from family and other sources.
When going with a mortgage that requires little or no down payment, you can expect a higher monthly payment since you'll have a higher loan amount and may have to pay for PMI. The final financed cost of the home will be higher since the interest gets charged to a larger principal amount. Additionally, mortgages with lower down payments usually have higher interest rates due to the higher risk that the lender sees with such borrowers, and this adds to the overall cost.
Exploring No-Money-Down Mortgages
If you want a mortgage that specifically requires no down payment, then your options include the government-backed programs from the U.S Department of Agriculture (USDA) and U.S. Department of Veterans Affairs (VA). Both programs allow for a 0 percent down payment unless the lender decides that the borrower's financial profile warrants a down payment. These programs also come with other perks that can make getting a mortgage more accessible, but they come with some strict requirements.
Read More: What Is an Average Home Down Payment?
USDA Loans for Rural Homes
To get financing through the USDA mortgage program, you have to earn no more than 115 percent of the median income where the property is located, so this works best for a low or moderate income. Further, the property you want to purchase has to be located in a rural area based on the USDA's mapping, so this limits you if you'd rather have a home in an urban area. The USDA's website allows you to search an address to see if the real estate you're interested in meets the guidelines.
USDA loans come with the benefit of no minimum credit score requirement, but lenders often like to see at least 640. Other requirements include paying both upfront and annual guarantee fees, using the home as your primary residence and meeting conservative debt-to-income (DTI) ratios of 29 percent for the front end (housing expenses) and 41 percent for the back end (overall debt). Lenders look at your financial profile, such as income and cash reserves, to decide whether you can get a USDA loan if you have higher DTI ratios.
Read More: What Types of Homes Are Approved for USDA Loans?
VA Loans for Military Affiliation
If you fall into any of the military-related eligibility categories the VA has set, then you could apply for a VA mortgage, which offers more flexibility for eligible properties than the USDA program. If you're an active duty service member, a veteran or in the Reserves or National Guard, you may qualify if you've served for the minimum time period the VA lists for your category, and you haven't received a dishonorable discharge. If you're a surviving spouse, you can also take advantage of the program. For anyone applying for the loan, the VA requires you to obtain a Certificate of Eligibility to verify you satisfy the loan criteria.
While there's no minimum credit score set by the VA, lenders usually like to see at least 620. Instead of paying PMI, you pay a one-time funding fee that ranges from 0.5 to 3.6 percent, but you don't have to pay this if you're a disabled veteran who gets VA compensation. The typical back-end DTI ratio is 41 percent, but the VA looks at your income, credit and debt situation when offering lenience for this. Your chosen property needs to pass a VA inspection for safety, and it must be your primary residence.
Exploring Low-Down-Payment Mortgages
If you don't want to buy a rural home and don't have a military affiliation, you have options for getting a mortgage with a lower down payment if you can afford it. These programs can work alongside down payment assistance grants or loans so that you might end up not needing a down payment anyway. Your options include conventional and Federal Housing Administration (FHA) loans.
Conventional Home Loans
Some conventional home loan programs like Home Possible® from Freddie Mac and HomeReady® from Fannie Mae can allow for as low as a 3 percent down payment and can also suit homebuyers with lower incomes. Further, these programs allow you to get your down payment funds from sources such as employer assistance, family members and secondary loans. You can also choose from a broad selection of properties and have a second financed property and still qualify.
You usually need a credit score of 620 for conventional loan programs, but the Home Possible and HomeReady programs may waive this requirement as long as your other financial information shows you can likely afford your mortgage payment. You need to pay PMI with a low down payment until you achieve 20 percent equity in the property. Income limits apply to borrowers in some locations for the Home Possible and HomeReady programs. Lenders often look for no more than a 45 percent back-end DTI ratio unless you have compensating factors.
FHA Home Loans
Government-backed FHA loans can meet your needs whether you struggle with your credit or just need to make less than a 20 percent down payment. With a credit score of 580 or higher, you only need a 3.5 percent down payment, while you need a 10 percent down payment if your score ranges from 500 to 579. You can use this mortgage to purchase a primary residence that's FHA approved as long as the loan amount doesn't exceed the maximum in the county where the home is. No income limits apply with this option.
With an FHA loan, you need to pay both upfront and ongoing mortgage insurance similar to the USDA guarantee fees. This is usually 1.75 percent up front and then between 0.45 and 1.05 percent annually. Your front-end DTI ratio usually needs to be no more than 31 percent, while your back-end DTI ratio can be up to 43 percent. Like with other options, lenders may allow for higher DTI ratios depending on your circumstances.
Finding Down Payment Assistance Programs
Quicken Loans advises that you can find several national and regional grant and loan programs that can assist with a down payment for a first home. Some of these programs simply gift you a specific amount of money, while others give you loans that may be converted to a grant later or have favorable terms that make repayment easier. You can also find programs that have you save toward a down payment and then gift you an equal amount of money.
Two ways to start finding such programs include checking your state's housing finance agency website and talking to a lender about first-time homebuyer programs. If you choose a secondary loan program, make sure you can afford that payment or find an option that's forgivable or deferred. You can also ask your lender about other options, such as letting a family member contribute part of your down payment.
Getting Qualified for a Mortgage
To take advantage of any low- or no-down-payment mortgage program, you should start meeting with potential lenders early in the home-buying process to go through the preapproval process. A lender will verify you meet the credit score, DTI ratio, income, down payment and other requirements for the types of home loans that interest you. They will also provide you with a preapproval letter showing a loan preapproval amount and sample terms you can consider. Expect to provide financial information and verification documents. You'll also undergo a credit check.
Read More: What Credit Score Do I Need for a Mortgage?
Completing the Home-Buying Process
You go through many steps, from your mortgage preapproval to closing, to complete the home-buying process. You can choose a real estate agent with whom you visit potential properties and decide when to make an offer. At the offer stage, you and the real estate agent draft paperwork with the contingencies and terms for the purchase and decide on a bid price and earnest money deposit. You give the earnest money when you submit the formal offer, and the process may go back and forth where you and the seller negotiate or you withdraw.
Your down payment comes due later in the process after you've had the offer accepted and you reach the closing stage. In between those times, you go through steps like getting appraisals and inspections, sending the lender documents, going through a title search and working out any issues that arise. You usually submit the down payment and closing costs at the closing meeting that's scheduled when everything is clear for the purchase process to complete.
- Consumer Financial Protection Bureau: How to Decide How Much to Spend on Your Down Payment
- Consumer Financial Protection Bureau: Determine Your Down Payment
- U.S. Department of Agriculture: Single Family Housing Guaranteed Loan Program
- U.S. Department of Veterans Affairs: Eligibility Requirements for VA Home Loan Programs
- U.S. Department of Veterans Affairs: VA Guaranteed Loan
- Lending Tree: Minimum Mortgage Requirements for 2021
- Fannie Mae: HomeReady® Mortgage
- Consumer Financial Protection Bureau: FHA Loans
- Rocket Mortgage: Down Payment Assistance Programs and Grants
- State of California: Home Buying Process
- Consumer Financial Protection Bureau: Seven Factors That Determine Your Mortgage Interest Rate
- Consumer Financial Protection Bureau: Contact Multiple Lenders
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.