When shopping for homes, most buyers are focused on what their future mortgage payment will be. However, sometimes it’s the down payment that scares off potential buyers. Turning over a large sum of cash or working for years to afford a down payment can worry buyers, particularly if they have little to no savings.
With so much information on the web about acceptable down payment percentages and requirements, it can be hard to know what to really expect. Specifically, can you really get a home for no-money-down? And if so, should you?
Here’s everything you need to know about purchasing a home with no-money-down.
No-Money Down Financing Options
It’s not a myth; there are actually a few ways to purchase a home with no down payment. While these loans are limited and few, they do exist. However, there are some rules and qualifications you’ll need to meet for each type of loan.
With a USDA rural development loan, low-to-moderate income households can qualify for a zero-down mortgage. This loan only applies to housing in rural areas, which are just about all areas outside of major metropolitans. You can check their map here.
Other application requirements include:
- Predictable income records (generally dating back 2 years)
- A combined monthly mortgage, insurance, and tax payment not exceeding 29% of your monthly income
- Average to fair credit history with no collections for the past year (applicants with a 640 or higher credit score receiver faster application decisions)
While these loans are great options for those without a huge savings account and have low-interest rates, be aware that you’ll end up paying more in the long-term than if you did have a down payment saved.
If you’re a veteran, a VA mortgage is a great option for a no-money-down loan. VA loans do not require mortgage insurance and provide 100% financing options. There is a VA funding fee (generally 2.5% of the loan amount) that is charged, but the fee can be added into the loan, rather than paid up front.
Specific requirements vary from lender to lender, though average credit scores for approval are 620 or higher.
Navy Federal Credit Union Loans
Military members and family are eligible to join the Navy Federal Credit Union and apply for a no-money-down loan. Mortgage insurance is not a requirement, which can save on monthly costs. Conforming loans are offered up to $424,100. In order to qualify for this loan, you must be a first-time homebuyer with a fair credit score.
If you’re not in the military or a member of the Navy Federal Credit Union, you won’t be able to apply for this type of loan.
Low Down Payment Financing
If you don’t qualify for one of the above no-money-down loans, FHA loans might be another option to consider. While traditional loans require a 20% down payment, FHA loans only require 3.5% down payments, in most cases.
FHA loans have more flexible requirements, generally approving applicants with a credit score of 580 or higher. If your credit score is below 580, you might still qualify if you pay a 10% down payment. FHA loans also offer relatively low-interest rates (in general, the higher your credit score, the lower your rate will be).
On the downside, the mortgage insurance required for FHA loans is more expensive than other loans.
What’s the Best Financing Option for You?
Some no-payment loans can be great options for qualified applicants who fit the strict loan requirements. While you’ll likely pay more over time than if you paid a down payment, for applicants without a down payment to spare, no-payment loans are available.
If you can afford a smaller down payment, an FHA loan might be a better option, with the chance to save you money and get you a low loan rate.
Before applying for financing, we recommend working with a qualified real estate agent to offer advice on your financing. A local agent can provide valuable advice on financing and mortgages, as well as offer guidance on every other step in the buying process.
Clever can connect you with a local, talented agent who can help steer you through the financing process. Clever works with top real estate brands and brokers throughout the country who can offer you up to 1% back through a commission rebate. Get connected with a Clever Partner agent to learn more.