Many Americans believe that if you want a house, you need a down payment. But that’s not true. You can finance a home without forking over a cent.
Of course, that’s not always wise, but we’ll talk pros and cons later. Let’s first explore the options.
Thank You For Your Service
Our first no down payment program is brought to you by the US Veterans Administration (VA). For vets with income and a good credit score, the agency offers 100% financing with no PMI.
PMI, or private mortgage insurance, is an expense paid monthly by borrowers who don’t shell out at least 20% for a down payment. You pay it until your equity rises to cover 20% of the loan. Depending on the amount you borrowed, avoiding this expense could save you thousands of dollars during the early years of your mortgage.
You can’t put all those savings in your pocket though. The VA charges a one-time, 2.15% fee to help the program fund itself. The good news is that this fee is not required up front. It can be rolled into the loan.
USDA Loans (Not Just for Farms)
While VA loans are great for those who served, what about civilians? That brings us to our second no down payment program, courtesy of the US Department of Agriculture (USDA).
The USDA’s home loan program began in rural America but now extends to the suburbs in many areas. In fact, it covers most places outside major cities. As long as you’re a low-to-moderate income homebuyer, the USDA may have something for you.
They offer two options, a single-family direct homeownership loan, and a single-family guaranteed homeownership loan.
Single-family direct covers low-income borrowers looking for homes that are less than 2,000 square feet in size with market values below the area loan limit. The limit adjusts based on local market conditions. For example, a borrower in suburban California, where real estate tends to be expensive, would be eligible for a larger loan than a borrower in a remote, rural area.
Single-family guaranteed has fewer restrictions and focuses on average income borrowers who earn up to 115% of the median income for their area.
Like the VA, the USDA will want proof of income and a good credit score. Unlike the VA, the USDA requires that borrowers pay mortgage insurance in the form of an upfront fee and an annual amount. But both fees can be rolled into your loan and will cost less than if you were paying PMI on a conventional mortgage.
Under certain circumstances, closing costs can also be financed into USDA loans.
If you can’t qualify for 100% financing through the VA or USDA, consider the Federal Housing Administration (FHA).
To secure an FHA-backed home loan, you’ll need a down payment, but the Administration will accept a payment consisting solely of funds gifted by others. So it’s not a no down payment program, but in the right circumstances, it can seem like one.
The FHA has lots of experience working with first-time homebuyers. They also accept low credit scores and folks who’ve gone through Chapter 7 bankruptcy — after a two-year waiting period.
Pros And Cons
The more you pay up front, the less interest you send to your lender. And since your lender risked less to loan to you, you end up making fewer PMI payments, too.
If you go the VA route, you don’t have to worry about mortgage insurance. But the USDA requires it, and you’ll have to make the payments for longer than you would have you dropped a few percent up front. Remember, if you make a down payment, you get to the 20% equity line more quickly.
Another consequence of no money down: it’ll be long before you can tap the value of your home for an equity loan or line of credit, which homeowners often use to make improvements or repairs.
But beyond being strapped for cash, there’s another reason to seek a no money down mortgage. You never want to be “house-poor.”
You don’t want all your money tied up in your house. If you empty your savings into a down payment, you won’t have anything left for emergencies. When disaster strikes, you’ll have to borrow - sometimes at high rates.
So you can’t afford a down payment. Or maybe a down payment would bust your emergency fund. If this is you, consider partnering with an experienced, local real estate agent with Clever Real Estate to help you with your no down payment financing options. They’ll also help with house hunting, applying for loans, and closing the deal on your dream home all while minimizing stress along the way.