How to Buy a House With No Money Down in 2020
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Borrowers curious about how to buy a house with no money down should know that no-down-payment home loans exist. There are low-down-payment options, too. You can even use first-time homebuyer down payment assistance programs to help cover your loan expenses.
What is a zero-down mortgage?
A zero-down mortgage is the same as buying a house with no money down, meaning the lender provides 100% of the financing. No-down-payment home loans are difficult to find because lenders generally prefer borrowers to put some money down to offset the risk of default. Homebuyers — especially first-time homebuyers — may be able to take advantage of local assistance programs to cover their down payment. Combining assistance programs with low-down-payment mortgages can result in little to no down payment if you qualify.
No-down-payment home loans
We’ll take a look at your options for buying a house with no money down, as well as what low-down-payment home loans are available.
0%-down home loans
The two main options for no-down-payment mortgages are from the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA). Here are the details:
VA loans are insured by the VA and offered by private lenders. In most cases, no down payment is required. Although the VA doesn’t have credit score guidelines, most VA lenders require a minimum score of 620. VA mortgages also don’t require mortgage insurance, which helps lower your monthly payment compared to other types of mortgages that do require it. Veterans, active-duty service members and eligible spouses are among those who can qualify for a VA loan. If you’re looking for a home loan for bad credit with no money down, this could be an option if you qualify.
USDA loans have two no-down-payment home loans to purchase an eligible rural property: the Single-Family Housing Guaranteed Loan Program and Single-Family Housing Direct Home Loan. Both programs have income limits and a minimum credit score of 640. To apply for the Single-Family Housing Guaranteed Loan Program, work with a USDA-approved lender. To apply for a Single-Family Housing Direct Home Loan, contact your local Rural Development office.
Low-down-payment home loans
No-down-payment home loans have fairly specific requirements. If you don’t meet zero-down mortgage guidelines, your next best option is to explore low-down-payment home loans.
Fannie Mae HomeReady® loans
Fannie Mae’s HomeReady mortgages offer down payments as low as 3%. It also allows co-borrowers who don’t live on the property. There are income limits; your income must be at or below 80% of the area median income, which you can find using Fannie Mae’s lookup tool. Fannie Mae requires a minimum credit score of 620, but you may receive better pricing on your loan if you have a credit score of 680 or higher. Fannie Mae allows a debt-to-income (DTI) ratio of up to 45%, but you may qualify with a DTI ratio up to 50% with compensating factors. If you’re making a down payment of less than 25%, you’ll need a credit score of 720 or higher if your debt-to-income ratio is above 36%. Your DTI ratio is your monthly debt payments divided by your gross monthly income.
Freddie Mac Home Possible® loans
Freddie Mac’s Home Possible program also requires just 3% down, and you can have co-borrowers who don’t live in the home on the loan. To qualify for a Home Possible loan, your income must be at or below 80% of your area median income. Freddie Mac requires a minimum credit score of 660 for a fixed-rate mortgage and 680 for an adjustable-rate mortgage. If you’re buying a manufactured home, you need a credit score of 720. The maximum DTI for a Home Possible loan is 43%. For the DTI ratio, Freddie Mac looks at the occupant borrower, not co-borrowers who aren’t living in the home.
With an FHA loan, you do need to put down a little bit more as a down payment than with the HomeReady or Home Possible loans, but it has more flexibility when it comes to credit scores. If you have a credit score of 580 or higher, you can put down as little as 3.5%. FHA loans don’t have an income limit, and you can have a DTI ratio of up to 50% if you have two or more compensating factors like cash reserves or significant income. If you have one compensating factor, you can have up to a 47% DTI ratio, and if you don’t have any compensating factors, you can have up to a 43% DTI.
State and local homebuyer assistance programs
One alternative to a zero-down mortgage is combining a low-down-payment home loan with a down payment assistance loan or grant. When you combine programs, you may end up with little to no down payment. State and local homebuying programs often provide down payment assistance programs with varying requirements. You may need to be below a certain income threshold or buy a home in a targeted area. Contact your state or local housing agency for more information.
Specialized mortgage programs
You can also find local and national programs aimed at specific professions that provide down payment assistance, which can result in little to no down payment. For example, the Teacher Next Door program offers up to $10,681 in down payment assistance. HUD’s Good Neighbor Next Door program for certain public servants provides a 50% discount off the listing price for homes in HUD revitalization areas. Some lenders offer special programs for doctors and veterinarians that have lower down payment requirements.
3 tips for how to buy a house with no money down
Buying a house with a no-down-payment home loan takes some planning. Here are a few tips to get you and your finances ready.
Check your credit. Most low- or no-down-payment home loans have minimum credit score requirements. Before you start applying, review your credit reports and credit scores from the three main credit reporting agencies — Equifax, Experian and TransUnion. Correct any errors by reporting them to the appropriate credit bureaus.
Boost your credit. Pay down your debt as much as possible to boost your credit score and lower your DTI ratio. Many lenders prefer a DTI ratio of 43% or less, but there are some exceptions. You can also improve your DTI ratio by increasing your income.
Ask for help. You can use gift funds to make your down payment, but the rules vary depending on the program. For example, Fannie Mae allows gifts from relatives (including spouses and children), and engaged and domestic partners. Meanwhile, FHA allows gifts from relatives, close friends with a “defined and documented interest in the borrower,” employers, labor unions, charitable organizations or a government agency offering homebuying assistance. Gift letters are typically required, so ask potential lenders whether gifts are acceptable for the loan program you’re using.
Pros and cons of buying a house with no money down
- You don’t have to deplete your savings. You can keep your savings for the inevitable emergency or long-term goals, such as retirement.
- You can realize your dream of homeownership sooner.
- You can find many low- and no-down-payment home loans with competitive rates and terms.
- You can use down payment and closing cost assistance programs to add to your down payment, especially if you’re a first-time homebuyer.
- You can start building equity. Equity is the difference between the value of your home and how much you owe, and it’s an asset that you can borrow against.
- You’ll pay for private mortgage insurance (PMI). This increases your monthly payments, but if you have a conventional mortgage, you can cancel it once you reach 20% equity in your home. Lenders are required to cancel your PMI once you reach 22% equity. If you get an FHA mortgage with less than 10% down, you’ll pay mortgage insurance for the life of the loan.
- You have to borrow more, which means you’ll have a larger monthly payment.
- You may not be able to buy as much house as you could with a larger down payment.
- Your bids may not be as competitive. Sellers may opt for a buyer who has a larger down payment in a multiple-bid situation.
- You’ll have to deal with more paperwork and a longer closing process. If you’re making a lower down payment, lenders will scrutinize you more closely.