What Is a No Down Payment Mortgage?
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 in the mid 600 range; 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, usually with minimum scores in the mid 600 range.
- 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 mortgages include FHA loans (with very low down payments), piggy-back mortgages, and borrowing from an IRA.
VA Home Loans
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 home loans for eligible veterans and active service members. Not only do these loans forgo the down payment requirement, but the VA funding fee can also be wrapped into the loan. Loan qualifications will vary from lender to lender, and while there is no minimum credit score requirement set by the VA, they recommend a credit score of at least 620. VA loan applicants must first obtain a Certificate of Eligibility (COE) from a VA eligibility center, by proving their military service.
USDA Rural Development Single Family Housing Programs
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.)
There are two loan programs the USDA offers for homebuyers—the Single Family Housing Direct Loan and the Single Family Housing Guaranteed Loan. Both programs are similar in that they guarantee no money down loans, however one key difference is the income thresholds for each program. In addition to satisfying location eligibility requirements, USDA loan applicants must fall between certain income thresholds, as these programs are geared to low- and moderate-income households who struggle to save for down payments.
While there is no stated minimum required credit score for these programs, lenders still take applicants' credit scores into account. For example, Single Family Housing Direct Loan applicants with a credit score of 640 or higher may qualify for a streamlined credit analysis. Another aspect to consider is that Guaranteed USDA loans also include specific closing costs like the guarantee and annual fees. These costs are typically 1% and 0.35% of the loan amount, respectively. However these fees can be wrapped 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 VA loans as well as other 0% down payment mortgages to qualified members buying primary homes. Eligibility is generally restricted to military personnel, U.S. Department of Defense employees, and their family members.
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 2% 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.
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. The FHA also has the Good Neighbor Next Door program for teachers, police officers, and other public employees, which offers a 50% discount on the list price of a home as long as the eligible buyer agrees to live in the home as their principal residence for 36 months.
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 a bad decision.