Accumulating enough savings for a down payment, closing costs, moving costs and an extra cushion of emergency savings can be the most challenging aspect of buying a home. Renters who want the stability and pride of homeownership and the opportunity to build equity in a property are sometimes thwarted by the lack of cash even if they have excellent credit and a stable income. Here's why: even federally-insured FHA loans require a down payment of 3.5%. That may not sound like a lot, but on a $200,000 home, you would need $7,000 just for the down payment. (For more on saving on your mortgage, read Score A Cheap Mortgage.)
TUTORIAL: Mortgage Basics
Zero down payment mortgage loans used to be a popular option when home values were rapidly rising and credit guidelines were looser. These days, almost no conventional loans are available without a down payment of at least 3-5% of the home price or more. However, some homebuyers may be able to qualify for a no down payment home loan through one of several programs. The caveat is that borrowers must be able to provide documentation of adequate income to repay the loan and must have good credit - at the very least a score of 620 or higher. Some lenders and loan programs will require a higher score. (For help on how you can improve your credit rating, check out 5 Keys To Unlocking A Better Credit Score.)
Military families and veterans may qualify for a VA (Veterans Affairs) loan, which offers 100% financing. The VA loan program has been in place since World War II and is an insurance program that guarantees loans up to a certain limit. In most areas that limit is $417,000, but the limit is higher in counties with expensive housing.
In order to apply for a VA loan, borrowers must obtain a Certificate of Eligibility (COE) from a VA eligibility center by proving their military service. After obtaining a COE, borrowers can work with any lender that offers VA loans.
VA loans not only do not require a down payment, but the mortgage insurance of 2.15 points (a point is equal to 1% of the loan amount) can be wrapped into the loan. Loan qualifications vary from lender to lender, but in general, VA loans require a debt-to-income ratio of about 41%. (To learn more about VA loans, check out The Unique Advantages Of VA Mortgages.)
USDA Rural Development Housing Loans
Some potential buyers who live in specifically designated regions of the country may qualify for a U.S. Department of Agriculture (USDA) Rural Development Housing loan. Although the loans are for "rural" areas, some eligible locations are actually near towns. Check the USDA eligibility page to find out if the area where you want to buy is a designated area.
Qualifying for a USDA home loan requires not only location eligibility but also conforming to income limitations. Borrowers can enter their zip code, income and number of household members on the USDA website to find out if they meet the guidelines.
USDA loans are geared to low and moderate income households who have the income to afford the home payments but may be unable to save enough for a down payment. Minimum credit scores vary from lender to lender, anywhere from 600 to 640 or above.
An upfront loan guarantee fee of 3.5% of the loan amount is required, but borrowers can wrap that fee into the loan balance to avoid the need for any cash at closing. (For more on mortgages, see Top 6 Mortgage Mistakes.)
State and Local Homebuyer Incentive Programs
Nearly every state, county and local jurisdiction in the country offers some type of homebuyer incentive program. These programs sometimes offer down payment assistance, closing cost assistance or low interest rate home loans or a combination of those features. While many are restricted to buyers by income level, some are not. Some, but not all, are restricted to first-time homebuyers. Many areas have programs designed to assist buyers in certain professions, such as teachers, medical personnel or first responders.
While not all these programs can eliminate the need for a down payment, some will offer a grant or an interest-free loan that will cover the entire down payment or a portion of it. The best way to find out about programs in your area is to search by state at the website of the National Council of State Housing Agencies.
The Bottom Line
Before you begin your search for a no down payment loan, be sure you can fully afford the payments associated with your home loan. Remember that if you do not make any down payment, you will lack equity in the property until you begin to pay off your mortgage or until the home rises in value. Be sure you won't need to sell the property for at least three to five years or more because it will take at least that long or longer to build equity.
If you have been unable to save enough for a down payment, at least make sure you have savings in the bank that can cover unexpected costs associated with homeownership. Consumers who lack any savings at all should consider waiting until they have built an emergency savings fund before taking on the responsibility of homeownership. (To help you determine if you are ready to buy a home, check out Are You Ready To Buy A House?)
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