Buying a house is an exciting life moment, but it can also be a very expensive life moment. It can be hard to save up for a down payment while still paying rent. You may hear a lot of advice about how you need to have a 20% down payment, but that actually isn’t the case. There are options for buying a house with no money down.
Keep reading to understand how to buy a house without making a down payment and what you need to know about making this type of financial move.
The Zero-Down Mortgage
A zero-down mortgage is a type of home loan that doesn’t require any down payment (aka 0% down). To get a zero-down mortgage, you’ll have to take out a government-backed loan. Lenders typically don’t offer zero-down mortgages that aren’t insured by the federal government, because if you stop making your mortgage payments, the lender will be on the hook for them. When you have a government-backed loan, the government is the one who takes the risk and will pay back the lender if you default on the loan. At the end of the day, government-backed loans are actually the least risky option for lenders.
Why is the government willing to take this risk for homebuyers? To provide those who need financial assistance with the help they need to buy a home. There are two types of government-backed zero-down mortgage loans: USDA loans and VA loans.
Related: 16 Types of Mortgages Explained
The United States Department of Agriculture insures USDA loans to encourage homebuyers to develop rural and suburban areas. They offer both mortgage loans and construction loans. Not only do USDA loans require $0 down, but they also tend to have fewer fees than other mortgage options.
To qualify for a USDA loan, the home you’re planning to buy or renovate has to be located in a suburban or rural area. Your home has to be a single-family unit that is being used as a primary residence and it can’t be a working farm.
Financially, to qualify, your combined gross household income can’t be more than 115% of the median income of the county your home is in. You also need a debt-to-income ratio that doesn’t surpass 45% and a FICO® score of 640 or higher.
With USDA loans, an appraisal by an independent third party is required before you can apply for the loan. The appraisal helps confirm that the value of the home (aka the selling price) equates to the loan amount they’ll be giving you. In other words, the house needs to be purchased for its actual value, not an inflated price. This appraisal serves dual purposes, as it also confirms that the home’s current condition meets USDA living standards. The home must be in basic livable condition to qualify for a USDA loan. The appraiser will make sure that the roof and heating systems work and are up to code, that there are no broken windows, and that there is no insect damage, amongst other USDA guidelines.
VA loans are only available to those who are a member of the national guard, active-duty service members, veterans, or the spouse of a deceased veteran. The Department of Veteran Affairs backs VA loans so that eligible applicants can receive a home loan without a down payment. To avoid paying mortgage insurance, with a VA loan you can pay a one-time funding fee that equates to 2.3% of your loan value. The Department of Veterans Affairs doesn't require any specific credit score, but the private lenders that issue the mortgage will require a credit score of 580 or higher.
You have to meet the following service requirements to qualify for a VA loan:
- Served 90 consecutive days of active service during wartime
- Served 181 consecutive days of active service during peacetime
- Served for more than six years in the National Guard or Reserves or at least 90 days under Title 32 orders, with at least 30 of those days being consecutive
- Be discharged because of a service-connected disability
- Be the spouse of a service member who died from a service-related disability or in the line of duty
To apply for a VA loan, you’ll first need to apply for a VA loan Certificate of Eligibility. Applicants can receive one by applying through their lender or through their VA eBenefits online portal. To apply, you’ll need to provide the following personal and services related information:
- Full name
- Date of birth
- Social Security number
- The date you started duty
- Any lost time
- Name of the command providing the information
Your current status, and type of service, can alter your application requirements. For example, veterans have to provide a DD Form 214, whereas active-duty servicemembers have to provide a signed statement of service.
Physician loans, also known as doctor loans, are a type of mortgage designed to help medical professionals buy a home without making a down payment. Unlike other types of low or no down payment required loans, physician loans don’t usually require paying private mortgage insurance (PMI) each month.
Physician loans can help new medical professionals buy a home since they’re at a disadvantage, savings-wise. Because doctors enter their careers after many years of school, they can have low savings and a large debt-to-income ratio. In some cases, they can struggle to provide proof of employment and income if they just graduated and are working as a resident, intern, or fellow, which makes it hard to qualify for a traditional mortgage.
To qualify for a physician loan, applicants must have obtained one of the following degrees:
In some cases, lenders will provide loans to medical professionals such as dentists, orthodontists, and veterinarians who have earned one of the following degrees:
While it may sound like new medical professionals would be a risky bet for lenders since they have so much debt, doctors tend to have stable and lucrative career trajectories that lenders will keep in mind. Because of their future earning potential, lenders often feel more comfortable granting medical professionals a no-money-down mortgage. If they don’t have pay stubs or W-2s, physician loan lenders are generally willing to accept a contract of employment to verify a doctor’s income (for example, if they are a resident or intern).
Other 100% Mortgages
While government-backed loans and physician loans can be helpful to those who qualify, many homebuyers won’t meet their niche qualifications. For those borrowers, working with a private lender may be their best bet.
Some private lenders do offer their own 100% mortgage financing products. Because of the risk level involved, you won’t find these loans with every lender, but it is worth looking into your options. Typically, these types of loans require the borrowers to use the property as their primary home and they must have high credit scores. If you pursue 100% mortgage financing through a credit union, you’ll generally have to be a member of the credit union in order to apply for a mortgage.
Pros and Cons of a Zero Down Payment Loan
Like any financial product, zero down payment loans have their advantages and disadvantages worth considering.
You can obtain a mortgage without having to provide a down payment.
You can use the money you would have spent on a downpayment to buy furniture or fund renovations
You can get into a home faster and stop paying rent sooner
You will have no equity built up in the home at the time of purchase.
You won’t be able to access a home equity loan or home equity line of credit until you build up equity.
It will take you longer to pay off your mortgage than it would if you put money down, which can lead to making more interest payments.
You may have to pay PMI for an extended period of time.
If You Saved for a Downpayment
If you saved up money for a downpayment, you’ll have more options to obtain a mortgage loan.
If you’re looking to get approved for a mortgage quickly so you can make an offer on your dream home, Credible can help you get the job done fast. With Credible, you can undergo an instant streamlined pre-approval process that only takes three minutes. Your credit won’t be affected by applying for an instant streamlined pre-approval letter. Credible allows you to compare different rates from multiple lenders and makes it easy to complete your mortgage application online thanks to bank integrations and automatic updates.
There are both pros and cons that come along with taking out a mortgage without putting any money down. Going this route can make it easier to get into a home faster, but will also cost you more in interest over the life of the loan.
When you don’t make any down payment, you won’t have any equity in the home until you start making payments, which can limit your future borrowing options. You’ll have to do the math to make sure that a no-money-down mortgage makes sense for you.