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What Is a Zero-Down Mortgage and When Is It a Good Idea?

What is a zero-down mortgage and how do they work? With this type of loan, there's no down payment required by the lender. There are some financing programs available for military and in qualified rural areas. Find out what's included and if it makes sense for you.
What is a zero-down mortgage and how do they work? With this type of loan, there's no down payment required by the lender. There are some financing programs available for military and in qualified rural areas. Find out what's included and if it makes sense for you.

Looking to buy that first home? For millennials and first-time home buyers alike, coming up with the down payment can be a huge hurdle to overcome. It can make the difference in whether you buy now or have to wait.

The good news is that there are some options for you if a down payment is stopping you from getting that new home. You may have heard that you can buy a home with little to no money down, making it easier to become a homeowner.

A Brief Intro to Down Payments

A down payment is an amount of money that you put down, or deposit, towards buying a home. Most lenders and most mortgages have down payment requirements of some amount. The funds are not borrowed or from a credit card—they are cash funds from personal accounts.

Your down payment lowers your loan amount or covers some of your closing costs when buying a home. The standard amount of a down payment is 20% of the total purchase price.

An example of this:

You are buying a home for $150,000. Your down payment is 20%, or $30,000. Instead of financing and paying interest on $150,000, your loan will be $120,000. Your payments and the amount of interest you pay over the life of the loan will be lower because of the down payment.

What is a Zero-Down Mortgage?

Zero-down mortgages were popular and available up until the end of the real estate bubble in 2007. While the standard down payment is now 20%, you can still find a zero-down mortgage today. It does take a bit more effort.

The most popular zero-down loans are with the Veteran's Administration and USDA. The goal of these two mortgage programs is to enable military or rural home buyers to finance homes.

Veteran's Administration Loans

Active-duty military, as well as honorably discharged veterans, qualify for this loan program. Surviving spouses of military personnel killed while on duty also can apply. These loans are available from many lenders and the Veteran's Administration guarantees them.

These loans are best if the house doesn't need work, A "fixer-upper" is not the right property for this type of loan.

Borrowers must live in the property. They are available to borrowers who have filed for foreclosure or bankruptcy.

USDA Loans

These are loans for buyers in specific rural areas. Currently, 97% of the United States is eligible for these loans. Borrowers must meet set income requirements. If your income levels qualify, you would eligible for 100% financing of your home.

These loans are available to first time home buyers. Unlike other types or mortgages, USDA loans are fixed-rate mortgages. There is no adjustable rate, or ARM option available.

Am I a Good Candidate for a Zero-Down Mortgage?

Deciding on what type of financing is best can be tough. Deciding on whether a zero-down mortgage is smart, can be confusing.

This type of mortgage can be a good idea for a well-qualified buyer that is doesn't have enough cash for a down payment. Zero-down loans also can make sense if you are planning to stay in the home for at least a few years.

Zero-down mortgages don't make sense if you can save enough or even some money for a down payment. Every dime you put towards a down payment will save you money in payments. If the real estate market is shaky or declining, this type of mortgage is risky.

A buyer’s agent is a great resource for learning more about home financing options. If you are unsure which type of mortgage is best for you, get in touch with Clever.

Clever can connect you with an experienced, local agent who can help guide you through the financing

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Thomas O'Shaughnessy

Tommy O'Shaughnessy is the Head of Research at Clever Real Estate, the free online service that connects you with top local agents to save on commission. Tommy's team of data scientists create surveys, gather data, and analyze trends in housing, real estate, and personal finance. He directs public relations efforts, acting as a "data communicator" between his team and the press. Clever studies have been featured in Politico, the LA Times, CNBC, Forbes, Yahoo Finance, and other publications.

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