How to Buy a House With No Money Down in 2021
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Borrowers wondering how to buy a house with no money down may want to check out no-down-payment mortgage programs. If you don’t fit the guidelines for zero-down loans, low-down-payment options often allow you to use funds from first-time homebuyers assistance programs to cover the cash needed for both your down payment and closing costs.
What is a no-down-payment mortgage?
A no-down-payment mortgage, also called a “zero-down mortgage,” is a home loan that doesn’t require a down payment for you to buy a home. The lender finances 100% of the value of your home. Even if you aren’t eligible for true zero-down home loans, combining available local down payment assistance program money with low-down payment mortgages can result in little to no down payment if you qualify.
One important note: Although the loan programs may not require any down payment, your real estate agent may suggest a large earnest money deposit to strengthen the offer on your house. You may also need to buy a home inspection to confirm the home is in good working order, and the lender may require your appraisal payment upfront. Make sure you discuss these details with your real estate agent and loan officer if you’re seeking a zero-down mortgage.
How to buy a house with no money down
There are several ways to buy a house with no money down, even if you don’t meet the requirements for a no-money-down home loan. In addition, low-down-payment home loan programs give you plenty of alternatives to saving up your own funds to buy a home.
Types of no-down-payment home loans
There are two 0%-down-payment loan options, and both are backed by the government. The U.S. Department of Veterans Affairs (VA) loan program is specifically for military borrowers, while the U.S. Department of Agriculture guarantees USDA loans for homes in designated rural areas.
VA loans are guaranteed by the VA and offered by VA-approved lenders. Even with no down payment, you don’t have to pay mortgage insurance, giving you a lower monthly payment compared with other low- or no-down-payment home loan options. An added bonus: The VA removed loan limits, which means VA borrowers can buy higher-priced homes with no down payment.
To buy a house with a no-money-down VA loan you need to:
- Provide a certificate of eligibility showing enough entitlement for zero-down payment financing
- Meet the 620 minimum credit score requirement typically set by VA-approved lenders (the VA guidelines don’t have a set minimum)
- Prove your total debt is 41% or less of your gross income, or your lender may ask for compensating factors like mortgage reserves or a higher credit score to approve your loan
- Prove you have enough free cash each month to meet the VA residual income requirement in your area
- Buy a home you intend to live in as your primary residence
- Pay a funding fee of 2.3% on your first no-down-payment mortgage, and 3.6% on subsequent homes unless you have a service-related disability
Technically, the VA does not have a minimum credit score requirement; they ask lenders to look at your entire borrower profile to determine your eligibility.
The USDA loan program provides low- to moderate-income homebuyers with no-down-payment mortgages to buy homes in USDA-approved rural areas. Although no mortgage insurance is required, eligible borrowers must pay an upfront guarantee fee and an annual guarantee fee that becomes part of the monthly payment.
To buy a house with a no-money-down USDA loan you need to:
- Prove the total income of all adults in your home is at or below the USDA limits
- Have a credit score of 640 or provide lender-requested evidence of how well you’ve managed credit
- Prove your total DTI ratio is 41% or less of your gross income
- Buy a primary residence in a designated USDA rural area
Types of low-down-payment home loans
If you aren’t a military borrower or don’t plan to buy in a rural area of the country, you may consider low-down-payment mortgage programs. All of the programs listed below allow you to use down payment assistance to meet both the minimum down payment and closing cost requirements of each loan.
Fannie Mae HomeReady loans
To qualify under Fannie Mae HomeReady guidelines you’ll need to:
- Have a credit score of at least 620
- Pay private mortgage insurance (PMI), which may be pricey if you have low credit scores
- Prove your DTI ratio is 45% or less, although a high credit score or cash reserves may allow up to 50%
- Buy a home that you plan to live in as your primary residence
Freddie Mac Home Possible loans
With a 3% down payment, you could get a Freddie Mac Home Possible® loan and qualify with the earnings of a co-borrower that doesn’t live in the home. Income limits apply, and the credit score requirements are higher than the Fannie Mae program.
You may qualify for a Freddie Mac Home Possible loan if you:
- Have a credit score of at least 660
- Pay PMI
- Prove your DTI ratio is 43% or less
- Buy a home as your primary residence
Mortgages insured by the Federal Housing Administration (FHA) require a bigger down payment of 3.5%, but allow for much lower credit scores than other low-down-payment loan programs.
FHA borrowers typically qualify if they:
- Have a credit score of at least 580 with a 3.5% down payment
- Have a credit score of 500-579 with a 10% down payment
- Pay an upfront and annual FHA mortgage insurance premium
- Have a total DTI ratio of 43% or less, although higher DTI ratios may be approved with compensating factors
- Borrow up to the maximum FHA loan limit for your area
- Buy a home as a primary residence
Types of down-payment assistance programs
The next best thing to qualifying for a zero-down loan is qualifying for down-payment assistance offered by local state and local housing finance agencies. You must meet the minimum mortgage requirements for the low-down-payment programs listed above, in addition to specific requirements set by the nonprofit or government agency offering the financial help.
Let your loan officer know in advance if you’re applying for down-payment assistance programs; not all lenders are approved to participate in them.
Typical features of down-payment assistance include:
Income limits. DPA helps low- to moderate-income borrowers with limited resources purchase a home. Check the income limits for any programs offered in your area.
Targeted neighborhoods. Homes determined to be “low-income census tracts” are often eligible for DPA money. Your local government housing agency or nonprofit typically has the most up-to-date information about available funds.
Profession-based programs. Local and national programs exist to provide down-payment help based on your job. For example, the Teacher Next Door educator programs offer as much as $10,681 in down payment assistance or grants of up to $4,170 ($6,000 in some areas) for teachers to buy homes in specific neighborhoods.
Recent homeowner restrictions. HUD’s first-time homebuyer DPA loans typically require proof you haven’t owned a home in the past three years.
Restrictions on how long you own your home. Read the fine print with any DPA program. They may ask you to repay the assistance if you sell your home before a set time period.
Pros and cons of buying a house with no money down
You’ll leave your savings alone
You can buy a home without waiting to save up for a down payment
You’ll have more deductible mortgage interest since your mortgage balance is higher
Your monthly payment builds equity in your home versus paying rent
You can add extra cash in an investment or emergency savings account
Your monthly payment is higher
You won’t qualify for as expensive of a home as buyers with down payments
You may be outbid by other buyers with large down payments
You may pay mortgage insurance if you’re applying for low-down-payment loans
You may have to jump through extra qualifying hoops for DPA assistance
FAQs about how to buy a house with no money down
- Are zero-down mortgages a good idea? If you have a stable job and income and extra rainy day money in the bank, a zero-down mortgage may be a good way to get your feet wet in homeownership.
- Can I get a gift for my down payment? All the low-down-payment loan programs outlined above allow for gifts for your down payment, plus closing costs up to a set limit. Check with your employer to see if they offer any homebuying benefits.
- How can I avoid PMI with no money down? VA and USDA loans don’t require PMI. If you have 10%, you can try a piggyback loan, which involves getting a home equity loan or home equity line of credit (HELOC) for another 10%. Also known as an 80-10-10 piggyback loan, you’ll avoid mortgage insurance and have a lower total payment than no-down or low-down payment loans.
- How can I get money for a down payment on a house? Setting up a down payment fund, using a savings app and setting aside tax refunds, bonuses and commission income over time or getting a side hustle for extra down payment income are just a few ways you can save for a down payment.
- What credit score is needed to buy a house with no money down? No-down-payment lenders usually set 620 as the lowest credit score to buy a house. You can boost your credit score by keeping your revolving charge card balances to a minimum and paying all your bills on time.