Low or No Down Payment: How to Buy a House With $0 Down
Coming up with a down payment is often the biggest hurdle first-time homebuyers face. Fortunately, there are ways to buy a home with a low or no down payment:
- VA and USDA home loans require no down payment at all.
- FHA requires 3.5% and there are conventional loans with 3% down payments.
- Down payment assistance (DPA) programs can grant or loan you a down payment.
Many of these programs are ideal for first-time homebuyers because they offer flexible underwriting.
USDA Mortgage With No Down Payment
The USDA created its rural housing program to help promote home ownership in rural areas. Designated rural areas cover about 75% of the land in the US and about half of the population. If you live in a smaller city or even in the suburbs outside major metros, your property may be eligible for USDA financing. You can see if your neighborhood counts as “rural” by using the USDA’s lookup function on its website.
The USDA offers two kinds of loans — a Direct program for low-income borrowers and a Guaranteed program for other eligible borrowers. The USDA funds its Direct loans and approved private lenders fund the Guaranteed mortgages. Income limits apply, so look up income eligibility for your area before applying.
Like most government-backed mortgage programs, USDA loans are only available for buying a primary residence — not a vacation home or rental.
VA Home Loan With Zero Down Payment
VA home loans for primary residences are an earned benefit available to active military members, veterans, and in some cases their families. They can offer some of the lowest interest rates available and require no mortgage insurance. (The VA does charge an upfront funding fee, which you can wrap into your loan balance if you choose).
The VA has no official minimum credit score or maximum loan amount. However, individual mortgage lenders often choose to set minimus of their own called “overlays.” Gustan Cho Associates has no overlays. Another advantage of VA home loans is that they are assumable. If you need to sell a home in a buyer’s market when rates are rising, an assumable mortgage can help you beat your competition for buyers.
There are no real downsides to VA financing unless you can make a 20% down payment. In that case, go with private financing and skip the funding fee.
FHA Home Loan With 3.5% Down
FHA home loans for primary residences can be approved with FICO scores as low as 580 (with 3.5% down) and 500 (with 10% down). Your entire down payment can come from a gift or approved down payment assistance (DPA) program. FHA lenders also allow sellers to cover closing costs up to 6% of the purchase price.
Understand that while FHA guidelines allow very low credit scores, most lenders choose to set their minimum scores higher — 600, 620, or 640 are common. These stricter requirements are “overlays” and you won’t find them at Gustan Cho Associates. If you are concerned about overlays, ask lenders about them before applying.
The downside of FHA loans is that their mortgage insurance is required for the entire loan term. You can’t cancel it when your loan-to-value falls below 80% like you can with most conventional (non-government) mortgages.
HomeReady Loan With 3% Down
This Fannie Mae program is widely available and offers a low down payment, flexible underwriting, and discounted mortgage insurance. One advantage of this program is that income from anyone living in the home can help you qualify for your mortgage. That means extended family, boarders, and anyone living in your guest house, apartment over the garage or basement — even if they pay you in cash.
In order to be eligible for the HomeReady program, you must not be an owner of another residential property in the United States. And you must complete an approved homebuyer course. You also must meet income limits or buy in a low-income or high-minority census tract.
You do NOT have to be a first-time buyer to qualify. Your boarders or family members do not have to be on the mortgage with you for lenders to count their income. And you can use HomeReady to buy most types of homes including manufactured homes, condos, and 2-4 unit properties.
Conventional 97 With 3% Down
The Conventional 97 program is a product offered by both Fannie Mae and Freddie Mac. The down payment minimum is just 3%. The loan is a little more restrictive than HomeReady but there are no income limits and you don’t have to take a home buying course. Here are the restrictions:
- Maximum loan size is $548,250, no exceptions.
- You have to choose a fixed-rate mortgage.
- Only one-unit dwellings are allowed.
- Your down payment can be 100% gifted from an approved source.
The Conventional 97 comes with private mortgage insurance (PMI). For most borrowers, the PMI is cheaper than FHA’s mortgage insurance premium (MIP) and you can request cancellation once you pay your loan balance down to 80% of the home’s purchase price.
What Is Down Payment Assistance (DPA)?
Down payment assistance, or DPA, usually comes from charitable organizations, local and state governments, or employers. It can be either a grant, which you don’t have to repay, or a loan with low or no interest. In many cases, the loan is forgiven after a number of years.
Mortgage lenders must make sure that down payment assistance comes only from approved sources. To find down payment assistance, search online for down payment assistance in your state. Or check out the State Pages on HUD’s website for housing assistance programs. You may have to meet income-related guidelines to qualify or buy a home in a redevelopment area.
Good Neighbor Next Door
One unique opportunity for law enforcement officers, teachers, firefighters, and emergency medical technicians is the Good Neighbor Next Door program. If you qualify and purchase an FHA foreclosure home, you can buy it for just $100 down.
But it gets better. You also get a no-interest loan for half of the purchase price. That loan requires no repayment while you live in the home and after three years, the loan goes away. Effectively, the program allows participants to buy homes for half price.
Seller contributions don’t count as down payment help. Sellers benefit from the sale of the property, so most lenders will not allow sellers to help you with your minimum down payment. However, sellers can help increase your down payment by contributing to your closing costs. That frees up money for a bigger down payment.
Keep in mind you can have your seller buy a single-premium mortgage insurance policy, pay your property taxes and insurance, and/or cover your mortgage lender fees. Here’s how much of the purchase price different programs allow sellers to contribute for closing costs.
- Conventional (non-government) loans: 3% for down payments under 10%
- VA home loans: 4%
- FHA and USDA mortgages: 6%
It’s often better for buyers to negotiate closing cost help from sellers instead of lower prices. Your lender can help you run the numbers and decide how to structure your offer.
“No Cost” Home Loans
Your mortgage lender cannot help you with your down payment. But a “no cost” home loan can help you reduce your closing costs and free up more cash for a down payment.
Obviously, there are costs when you take out a mortgage, and no lender works for free. But in exchange for increasing your interest rate slightly, most lenders can cover your closing costs.
Mortgage Insurance (PMI) Isn’t Evil (Here’s Why)
When you buy a home with a low down payment or no down payment, you almost always need some form of mortgage insurance. Government-backed loans have their own insurance, and conventional loans require private mortgage insurance or PMI.
Everyone wants to know how to avoid PMI, how to cancel PMI and if there are mortgages without PMI. That’s understandable because PMI does add a monthly cost to your mortgage. But that’s not the whole picture. PMI gets you into a home sooner and started you building wealth in the form of home equity. Yes, PMI can actually help you make money.
If you can save $500 a month and need 20% down for a $200k house, it would take almost seven years to get there. And in seven years at a normal rate of appreciation (4% per year) your house value would have increased by over $50k. Trying to hit a moving down payment target can be frustrating. PMI helps first-time buyers get into that first home. much faster.
Don’t Use Your Entire Savings to Buy a Home
Is it always best to make the biggest down payment possible? Not necessarily. Having a bigger down payment means having a smaller mortgage payment, and that can make your home more affordable. But don’t increase your down payment if it means draining your emergency fund, tapping your retirement account, or running up credit card balances.
Lenders find that borrowers who have enough ready cash to make several months of mortgage payments are a lower risk. That’s because they can continue paying their mortgage even if their income is interrupted. Any money that you’ll have after you close your mortgage is called “reserves.” Reserves are measured in months — the number of mortgage payments you can make with your savings.
Lenders like to see at least two months of reserves for salaried borrowers and six months for self-employed borrowers.
Down Payment FAQs
How can I buy a house with no money down?
There is such a thing as a no money down mortgage. Both USDA and VA home loans require no down payment, and FHA home loans allow 100% of your down payment to come from a gift or down payment assistance program.
Can I use a cash gift for my down payment?
Most mortgage programs allow you to use gift funds for some or all of your down payment. The gift must come from an approved source. That means no one who benefits from the property sale, like the seller, real estate agent, or lender, can donate a down payment. But family members, close friends, employers and approved programs can provide down payments.
You just need to document that the donor is in possession of the funds (for instance, with a copy of the donor’s bank statement. You must prove that you received the money (one way is to provide a copy of the check and deposit receipt) and obtain a letter from the donor stating your relationship and that the money is a gift.
Are there any home buyer grants?
Most programs set limits on the participants’ income and also require applicants to complete a homebuyer education course.
The other form of DPA is a low- to no-interest loan. In many cases, no payments are required — you just pay the loan back when you sell the property. And sometimes, the loan is forgiven and it goes away if you keep the home as your primary residence for a number of years.
Is it better to put more money down?
Making a higher down payment does offer some benefits:
- It’s easier to qualify for a loan with a bigger down payment.
- Your mortgage insurance premiums are lower (or not needed at all).
- Your monthly mortgage payment is lower, making your home loan more affordable.
If you can afford to make a bigger down payment, do it. IF you’ve paid off high-interest debt, established your emergency savings, and funded your retirement account.
What are the advantages of a low down payment?
A smaller down payment allows you to get into a home sooner because you’re not waiting until you have saved 20% down. It also allows you to use your money for other, perhaps more pressing things. Making a smaller down payment frees up cash for paying off expensive debt, making investments, preparing for emergencies, or paying for college.
The disadvantage of a small down payment is that your monthly mortgage payment is higher. That’s because your loan is larger but also that your mortgage insurance premium is higher.
If I make a low down payment, do I pay mortgage insurance?
Most borrowers pay monthly PMI and cancel it when their loan balance reaches 80% of the home purchase price. However, you can also pay a single-premium PMI (it runs between 2% and 4% of your loan amount) and have no monthly premiums. If you can convince your seller to pay the premium, that can save you a lot more money than negotiating a 2% reduction in the sales price. Ask your lender o help you run the numbers.
If I make a low down payment, what are my lender fees?
Your lender fees depend on the loan program you choose. The lower your down payment, the larger your loan amount. And because most lender fees are some percentage of your loan amount, a larger loan often means slightly higher fees. Understand that those fees are higher only because your loan amount is — not because your lender hits you with a “low down payment” fee (there is no such thing).
In some cases, making a smaller down payment does add charges to your loan. Fannie Mae and Freddie Mac, for instance, add risk-based pricing adjustments to loans with lower down payments. Those fees go to Fannie and Freddie, not your lender. In general, making a lower down payment does not impact your lender fees much (or at all).
What is the minimum down payment for a mortgage?
The minimum down payments depend on the program you choose:
- VA loan: 0% down payment
- USDA loan: 0% down payment
- Conventional 97 mortgage: 3% down payment
- HomeReady mortgage: 3% down payment
- FHA loan: 3.5% down payment.
And don’t forget to explore boosting your down payment by choosing a no-cost loan, getting the seller to cover closing costs, applying for DPA, or asking loved ones for gifts.
Are there zero-down mortgage loans?
Yes, there are zero-down mortgage programs — specifically, the government-backed USDA and VA home loan programs. You can also get a zero-down mortgage by using gift funds from your relatives, friends, employer, or an approved DPA program to buy a home with nothing out-of-pocket.
Can I borrow a down payment?
You can borrow down payment funds if you do it correctly. One way is to take a loan against your 401(k) plan if your employer allows it. You can legally borrow against half of your balance or $50,000, whichever is less.
You can borrow a down payment from a DPA program. Those low- to no-interest loans may require no payments while you own your home, and the loan may be forgiven after a number of years.
Finally, you can borrow down payment funds if you do it months before applying for a mortgage. In that case, you take out a personal loan, add the money to your savings and let it sit for a couple of months. This is called “seasoning.”
Once the borrowed funds have been added to your account, they become co-mingled with your savings. When you apply for a mortgage, you’ll supply a bank statement showing all the seasoned funds in your savings account and you’ll disclose the loan on your mortgage application.