Buying a home is a goal for many Americans. Unfortunately, saving for a down payment can feel like a daunting task. The good news is that a down payment doesn’t have to be an impediment to getting a home loan. In fact, many people think they need 20 percent down, which is just not true.
There are no down payment home loans, as well as mortgages that you can get with a small down payment. Here’s what you need to know about buying a home with a small down payment — or even no money down.
Pros and cons of a no down payment home loans
Before deciding how to buy a house, it’s important to understand the implications and your options when it comes to low 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 and enjoy homeownership sooner, 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: Finally, with a no down payment loan, you might be able to purchase a home sooner than expected. If you want to take advantage of a good deal or a dip in the market, you can move fast without having to spend time saving for a down payment.
- 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’ll owe nearly 100% of the home’s value. You won’t be able to tap into equity in an emergency. During a downturn, the lack of equity can potentially result in you owing more on the house than it is worth, making it difficult to sell your home and move if that becomes necessary.
- 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.
Before deciding if a zero down mortgage is the right choice for you, carefully consider the benefits and drawbacks, and determine what’s likely to work best in your situation.
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.
The U.S. Department of Agriculture offers a mortgage guarantee program for those who choose to buy in designated rural areas. You also have to meet income requirements and, in some cases, be a first-time homebuyer. Additionally, there are limited funds for this program, which are dispersed on a first-come, first-serve basis.
Like most government-backed loan programs, you actually get the loan from a private lender. The USDA then guarantees the loan. There is an upfront guarantee fee that is added to the loan cost and can be rolled into the balance.
If you qualify for a loan backed by the U.S. Department of Veterans Affairs, it’s possible to buy a home with no money down. You get a loan through a private lender, and the VA guarantees it.
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. You can roll the funding fee into the loan.
Navy Federal Credit Union
One of the biggest credit unions, Navy Federal offers a 0 percent down mortgage option for military members, military families and some civilian employees of the U.S. Department of Defense.
You can get a mortgage without a down payment from the credit union, but you’ll have to pay a funding fee. However, that funding fee is a flat rate, and might even be lower than the VA loan funding fee, depending on your situation.
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 rates. Additionally, you have to pay mortgage insurance, which can increase your monthly payment and the overall cost of the loan.
This mortgage is available from many lenders and is backed by Fannie Mae, a government-sponsored enterprise tasked with maintaining liquidity in the housing market. The down payment requirement is 3 percent, which makes it doable for many families, even if they can’t get a zero-down mortgage.
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
This is another GSE-backed mortgage program. Available from Fannie Mae and Freddie Mac, the Conventional 97 only requires a 3 percent down payment. You do need to be financially prepared to pay mortgage insurance, however.
One of the advantages of this program is that the down payment can come entirely from gifted funds. As a result, you’re able to get help from close relatives in raising the money to make your down payment.
Private mortgage insurance (PMI) is often seen as a bad thing because it’s an extra cost every month. However, it’s not necessarily true that paying PMI is a complete disadvantage — especially if you decide that getting into a home with a lower down payment is the right move for you.
While you might be able to figure out how to buy a house with no money down, some of the costs might be larger than expected. That’s especially true if you roll the funding fee into the loan and thus rack up interest on the funding fee for the life of the loan.
You might not relish the idea of paying PMI, but if you’re willing to take on the cost, it can get you into a house sooner, and with a lower down payment, leaving more leftover cash available to you.
Plus, PMI can be removed once you reach a loan-to-value ratio of 80 percent. So, once you build enough equity, the PMI is removed and the cost disappears. With a funding fee rolled into your loan amount or mortgage insurance from an FHA loan, that’s forever — unless you refinance.
It’s up to you to decide how buying a home fits into your long-term financial goals, and what’s worth it to you. Whether you get a zero down mortgage or whether you save up a down payment of 20 percent — or do something in between — carefully consider your own situation and make a choice that’s right for you.