Zero-down or no-money-down mortgages were readily available prior to the subprime mortgage meltdown of 2008, when home values were rapidly rising and credit guidelines were more lax. Today, unfortunately, no-down-payment mortgages from commercial lenders are extremely rare, and those that exist are only available to select individuals who can document an adequate income—often, along with minimum credit scores of 720; many private lenders require even higher credit scores.
Thankfully, there are several no-down-payment public programs that some aspiring homeowners may qualify for. This article lists some of these lesser-known loan options—and some alternatives if you aren't eligible for any of them.
- Today, no-down-payment home loans are only available to select individuals, who can document adequate income needed to repay the loan and high credit scores. Such home-buyers must also exhibit good credit, with minimum scores of 620.
- There are some no-down-payment public programs, such as VA Loans, USDA Rural Development Housing Loans, and Navy Federal Loans.
- Alternatives to no-down-payment morgages include FHA loans (with very low down payments), piggy-back mortgages, and borrowing from an IRA.
Military families and veterans may qualify for a VA (Veterans Affairs) loan, which offers 100% financing. Available since World War II, this insurance program guarantees loans up to a certain limit—typically $424,100. Not only do these loans forgo the down payment requirement, but the mortgage insurance of 2.15 points can be wrapped into the loan. Loan qualifications vary from lender to lender, but they generally require a debt-to-income ratio of about 41%. VA loan applicants must first obtain a Certificate of Eligibility (COE) from a VA eligibility center, by proving their military service.
USDA Rural Development Housing Loans
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 these are meant for remote area residents, some residents living closer to town centers may also be eligible for this program. (Check the USDA eligibility page for designated areas.)
In addition to satisfying location eligibility requirements, USDA loan applicants must fall below certain income thresholds, as these programs are geared to low- and moderate-income households who struggle to save for down payments. Minimum required credit scores range from 600 to 640, and upfront loan guarantee fees of 3.5% of the loan amounts are required, however, borrowers can wrap those fees into the loan balance, thus avoiding the need for cash at closing.
Navy Federal Loans
Navy Federal Credit Union--the nation's largest in assets and membership, offers 100% financing to qualified members buying primary homes. Eligibility is restricted to military personnel, U.S. Department of Defense employees, and their family members. This zero-down program is similar to the VA's but boasts lower funding fees of 1.75%.
When Are No-Down-Payment Mortgages a Bad Idea?
Putting zero money down has its drawbacks. If you finance 100% of a home purchase, you have no equity in the property – that is, you don't own any of it outright, like you would if you'd made a down payment. Consequently, lenders may tag you as a high-risk borrower, and require you to secure private mortgage insurance (PMI) before they sign off on the loan. This insurance, which protects the mortgage company if you default on the loan, typically costs between 0.5% to 1% of the entire loan amount, on an annual basis. And unlike the mortgage payments themselves, this expense may not be tax-deductible.
Finally, zero down payment mortgages often carry higher interest rates than traditional mortgages, since lenders usually reserve the best terms for borrowers who can pay upfront cash. For example, in mid-2019, Louisville, Ky.–based Republic Bank was offering a no-down-payment mortgage with no PMI and a seven-year adjustable rate mortgage (ARM), that had an initial interest rate of 4.729%. This rate was nearly a full percentage point higher Wells Fargo’s advertised rates at the time. The monthly payment on Republic Bank’s loan would have been $533 for every $100,000 borrowed, for the first seven years, after which time interest rate adjusted once a year, based on the LIBOR rate plus a margin of 2.75%.
Alternatives to No Down Payment Mortgages
If you don't qualify for one of the zero-down payment loan programs, alternatives exist. Such as:
Nearly every American state, county, and municipality offers some type of home-buyer incentive program, that provides down payment assistance, closing cost assistance, low interest rate home loans, or a combination of the above. Many are restricted to buyers who meet certain income levels, and some are restricted to first-time homebuyers. Furthermore, some programs cater to groups of professionals, such as teachers, medical personnel or emergency first responders. While not all of these programs can eliminate the need for down payments, some offer grants or interest-free loans that cover some or all of the down payment.
These loans require 3.5% down payment. However, FHA guidelines allow for down payments to be funded by financial gifts from relatives, fiancées, nonprofit organizations, or other sources. The FHA likewise offers the Good Neighbor Next Door loan to teachers, police officers, and other public employees, who may buy a home with just $100 down—not quite 100% financing, but very close.
This strategy involves taking out two loans—one for 80% of the home's purchase price, the other for as much of the remainder as possible. Prior to the subprime mortgage crisis, an 80%/20% split was quite common. In today's tougher climate, the max might be an 80%-15%-5% plan, where you finance 80% with a primary mortgage, 15% with a second mortgage or home-equity loan, and make a 5% down payment.
Wait and Save
Postponing the home-ownership dream until you can make the standard down payment is a viable option. Besides, the time to buy may come sooner than you think, especially if you have some savings already socked away. For example, up to $10,000 may be withdrawn from an IRA for first-time home-buyer expenses—including down payments—without incurring the typical 10% early withdrawal penalty.
The Bottom Line
Gone are the days where practically anyone could secure an easy mortgage with little or no money down. But there are public programs, and a few private lenders, who can help. But if these don't work for you, financing with a down payment might not be Interestingly, mortgage interest rates are presently at historic lows. Consequently, some financial experts believe that now is an ideal time to lock in those rates, before they begin climbing.