VA loans
If you’re an active-duty service member, veteran or the spouse or dependent of one, a loan insured by the U.S. Department of Veterans Affairs may be an affordable option for buying a home. These no down payment mortgages generally have reasonable interest rates and don’t require mortgage insurance (as long as the sales price doesn’t exceed the appraised value).
Housing finance authority (HFA) loans and assistance
Most state housing finance agencies have home loan programs for low- and middle-income borrowers. Generally, these agencies help connect you with participating lenders. You may also be eligible for loans and grants to help cover down payments and closing costs associated with an HFA loan. Income qualification requirements and loan terms vary widely, so you’ll have to reach out to your state’s HFA directly to find out what’s available in your area.
Not all prospective buyers will qualify for a no-down-payment home loan—nor does this kind of mortgage make sense for every situation.
No-down-payment loans are generally best for a borrower “who has accumulated limited savings but has enough income to cover the monthly payment and build up savings simultaneously,” said Matt Hackett, operations manager at Equity Now, a direct mortgage lender in New York City.
How to get a no-down-payment mortgage
Applying for a no-money-down home loan is similar to applying for any other mortgage. You’ll still fill out a bunch of paperwork, provide documentation showing you meet the qualification requirements for your loan type, and work with your lender to make sure they have everything they need to complete the underwriting process.
Depending on which no down payment program you’re applying for, the nitty-gritty of this process could vary slightly. For a USDA loan, you’ll have to find an approved mortgage lender in your area that offers these loans and work directly with them. Before you apply for a VA home loan, you’ll need to get a certificate of eligibility through the U.S. Department of Veterans Affairs—sometimes the lender you choose can help you with this documentation.
The HFA loan process varies by state, so check with a counselor in your area. Depending on the type of assistance you’re receiving, you may need to coordinate with both the HFA and your lender. To avoid duplicating your efforts, get organized upfront with all the paperwork both parties will need.
Risks of buying a house without a down payment
While buying a home without putting down any cash seems like a great opportunity, it’s not without risks.
First, if the market shifts and the value of your home drops, you’ll end up with negative equity in your home—in other words, you’ll be underwater on your mortgage. If you sell, you’ll have to make up the difference between how much you get on the sale and how much you owe your lender or risk defaulting on your loan.
While this may not be a big deal if you stay in your home long enough to build up equity, it could cost you if you’re forced to sell.
Another risk is that a mortgage with little to no down payment will cost you more in the long run. For example, you may end up with a higher interest rate to offset the risk a lender takes in working with you. This will still depend on the type of mortgage you have and other factors like your creditworthiness. But it’s important to price out how much different options will cost you over time and determine whether saving for a down payment will net you a significantly better deal.
When it comes to added costs, you should also take into account mortgage insurance and fees. USDA loans have a one-time loan guarantee fee of 1% and an annual fee of 0.35%. VA loans have a funding fee that varies by loan. Other loans may come with mortgage insurance until you build up equity in your home.
Is there an alternative to a no down payment mortgage?
If you don’t qualify for (or aren’t sold on) a no down payment mortgage but don’t have a big chunk of change to spend on a home, not to worry. There are a few alternatives to consider.
FHA loans
These are serviced by traditional lenders but insured by the Federal Housing Administration, which means you may be offered reasonable rates with a down payment as low as 3.5%. FHA mortgages also have more lenient credit requirements than some conventional loans. The downside: You’ll pay mortgage insurance on your loan no matter what—generally until you’ve paid off what you owe.
Conventional loans
Some mortgage lenders allow you to put down as little as 3% on a conventional home loan. This comes at a cost, though. You generally have to pay private mortgage insurance if your down payment is less than 20% of your purchase price. Unlike with an FHA loan, you can request to cancel your PMI when you’ve built up equity in your home—and your loan servicer must cancel it automatically once you reach a certain threshold.
HomeReady and Home Possible
Fannie Mae’s HomeReady program offers mortgages to low-income borrowers and requires only 3% down, which can come from gifts, grants and community funding sources. You don’t have to contribute any of your own money to a down payment if you can find support elsewhere. Freddie Mac’s Home Possible mortgage is similar.
Borrowing from family and friends
Your parents, relatives or close friends may be willing to loan or gift you funds to cover a down payment. Of course, taking money from loved ones can get complicated, so make sure you’re on the same page—and consider creating legal documentation to protect both parties. Some lenders require documentation that shows you won’t have to pay back the gift money.
Down payment assistance (DPA) loans and grants
Your state HFA may offer or subsidize loans and grants to cover your down payment and closing costs for a non-HFA mortgage. Sometimes these loans are forgiven if you stay in your home for a certain amount of time. Grants generally do not have to be repaid. You may also find these programs directly through community housing organizations and nonprofits in your area.
But just because you can put down a chunk of your savings on a home doesn’t mean you should. In some cases, it might make sense to make a slightly smaller down payment and keep some cash in reserve for other home-related expenses or emergencies.
“If coming up with 3% down leaves you in a situation where you have very minimal reserves and your boiler breaks, you’re going to be in a bad spot,” Hackett said. “You have to figure out how much money you’re going to have left over after the closing and see if you feel comfortable putting the money down for the down payment.”
Conclusion
This may seem like a tricky thing to navigate. It is. But you’re not alone. And you don’t have to commit to a mortgage until you have all the information you need.
If you need help figuring out your options, reach out to a counselor approved by the U.S. Department of Housing and Urban Development (HUD). Counseling agencies help buyers navigate the home loan process. While they can’t hook you up with no down payment mortgage directly, they can help you understand loan details and terms—and at little or no cost.
HUD also maintains a list of housing assistance resources by state, where you’ll find assistance programs, counseling agencies, and other state services for homebuyers and homeowners.
Another good resource is your local HFA—contact them to find out whether you’re eligible for down payment assistance and what that process involves. Or speak with a lender that offers a particular type of loan you’re interested in.
“If you can get the info from the source, that’s the best way to go,” Hackett said.
Disclaimer: The above is solely intended for informational purposes and in no way constitutes legal advice or specific recommendations.
