While not the most common lending scenario when buying a home, some buyers can qualify for select mortgage loans with no down payment.
As the down payment is typically the biggest obstacle for most would-be home buyers, finding a zero down mortgage or a lower down payment option can be a significant boon for those on the journey to homeownership.
Here, we’ll cover a couple of specific scenarios in which home buyers can obtain zero down mortgage loans and additional helpful information for other programs that can help minimize or eliminate upfront costs.
Mortgages 101: Understanding Lending for Homes
Various types of home loans can be found on the market, each offering different perks and upfront payment requirements. As a first step, understanding the basics of mortgage loans can help prospective buyers sort through the criteria of different options on the market to bring clarity to the decision.
It’s important to understand that a down payment typically goes directly towards the purchase cost of a house. Like anything else you might finance, larger down payments mean lower monthly payments for the life of a loan.
Before moving forward with getting preapproved for a mortgage loan, try calculating your mortgage with our free tool to run different numbers and mortgage rates. You might be surprised to learn that other options are just as favorable as mortgage loans with no down payment.
Which Type of Mortgage Does Not Require a Down Payment?
Between the kinds of mortgages available, only a couple have inherent options for zero down home loans. Let’s take a look.
VA Loans: Homeownership for Veterans and Service Members
As a veteran, active-duty service member, or surviving spouse, a VA loan can be a powerful tool to achieve your dream of homeownership. Backed by the Department of Veterans Affairs, VA loans offer several advantages, including the potential to avoid a down payment.
Instead of a down payment, you’ll pay a one-time VA funding fee. This fee varies depending on whether it’s your first time using a VA loan (2.15% of the loan amount) or a subsequent use (3.3%) after a previous home purchase within the last 10 years – though this can vary between lenders. Notably, VA loans also skip private mortgage insurance (PMI), saving you money each month.
Here’s how to qualify for this type of zero down home loan:
- Military Service. You’ll need to meet minimum service time requirements, which vary depending on your service era. Generally, this includes 90 days of active duty during wartime, 181 days during peacetime, or at least 6 years in the National Guard or Reserves. Spouses of veterans who died serving or those with service-related disabilities may also be eligible.
- Credit Score. While specific lender requirements may differ, a credit score of at least 580 is a good starting point. Unlike many other mortgage types, debt-to-income (DTI) isn’t as large of a factor when determining eligibility.
- Funding Fee. Instead of private mortgage insurance (PMI), VA loans require a one-time VA funding fee. This fee is a percentage of your loan amount and can be rolled into your mortgage payment for easier management.
Though most VA loans have some upfront costs, many find these zero down mortgage loans eliminate most of the expenses for veteran home buyers. To uncover specific information on eligibility requirements, visit the VA website to learn more.
USDA Loans: Zero Down Mortgage Loans for Rural and Suburban Homes
USDA loans, backed by the US Department of Agriculture, aim to promote development in qualified rural and suburban areas. While not all lenders offer USDA loans, it’s still a valuable option for a zero down mortgage if you’re looking to buy in an eligible location.
Similar to VA loans, USDA loans allow for zero down payment purchases. As a bonus, they often have lower fees than other kinds of mortgages.
Here’s what you’ll need to consider for eligibility:
- Location. Your future home must be located in a USDA-designated rural or suburban area. Thankfully, the USDA offers a handy map tool to see if your desired location qualifies. Generally, areas outside the designated orange zones on the map are considered rural.
- Property Type. USDA loans are limited to single-family homes that will be your primary residence. Farms used for income generation are not eligible.
- Income Limits. Your household income must fall within certain limits based on the area’s median income (typically capped at 115%). Additionally, your debt-to-income ratio should ideally be below 41%, with housing-related expenses not exceeding 29% of your gross income.
- Credit Score. A minimum credit score of 640 is recommended for the best chance of approval.
A USDA loan has more requirements when compared to most other kinds of home loans. But, it’s perhaps one of the most accessible mortgage loans with no down payment for those without military service.
Mortgages and Programs With Low Upfront Costs
The reality of most mortgages is that the buyer usually pays something upfront, whether a down payment or some other kind of fee. Here are a few options that aren’t quite a zero down mortgage, but can help reduce initial expenses significantly.
Conventional Loans
While a 20% down payment is often associated with conventional loans, it’s not always necessary. Many lenders offer options for first-time homebuyers (those who haven’t owned a home in the past 3 years) with as little as 3% down.
Keep in mind that down payments below 20% almost always require private mortgage insurance (PMI) that protects the lender in case you default on the loan. Fortunately, PMI can be canceled once you reach 20% equity in your home based on your mortgage payments.
Fannie Mae and Freddie Mac Options
For those with low-to-moderate incomes compared to others in their area, Fannie Mae’s HomeReady and Freddie Mac’s Home Possible loans are about the closest to zero down payment mortgage loans you can find on the market.
Both programs allow you to purchase a home with a 3% down payment and potentially benefit from lower mortgage insurance options. Additionally, both programs offer a credit towards your loan closing costs (loan level price adjustment or LLPA) of up to $3,500.
There are income limitations associated with these programs, and your income cannot exceed 80% of the area’s median income to qualify. However, unlike USDA loans, this income limit applies only to those named on the loan (i.e., not your entire household).
Finally, the Freddie Mac BorrowSmart Access program can help residents in specific underserved communities achieve homeownership by assisting with upfront hurdles.
BorrowSmart Access provides down payment assistance of $3,000 to qualified borrowers in designated metropolitan areas. To qualify, you’ll need:
- A minimum down payment of 3% (which can include the assistance)
- The home must be a primary residence
- A credit score of at least 620
- To meet income restrictions for the area and have at least one first-time homebuyer on the loan application.
Eligible applicants will also need to complete a free homeownership education course. Once all the boxes are checked, many find this option a great alternative to other mortgage loans with no down payment.
FHA Loans
FHA loans are a good option for those with a lower down payment, as most require only a 3.5% down payment. They also often have fewer qualifying requirements compared to USDA and VA loans, but there are still some stipulations:
- The property must be your primary residence
- It must meet FHA standards for livability and
- You must move in within 60 days of closing.
If your down payment is less than 10%, you’ll likely be required to pay mortgage insurance for the life of the loan. Some homeowners choose to use an FHA loan initially, then refinance to a conventional loan once they have built up 20% equity in their home. This allows them to avoid the ongoing mortgage insurance requirement while taking advantage of the low upfront costs.
Final Thoughts on Mortgage Loans With No Down Payment
Even though there are only a few standard mortgage loans with no down payment typically required, VA and USDA loans are excellent options for qualified individuals on eligible properties.
Even if you don’t qualify for a zero down mortgage, one of the other low-cost mortgage types discussed in this article could be the ticket to obtaining a new home!
