How To Buy A House With No Money Down
*As of July 6, 2020, Rocket Mortgage ® is no longer accepting USDA loan applications.
For many people, a down payment is one of the most significant barriers to homeownership. Making a 20% down payment isn’t feasible for many people, so they assume they can’t buy a house.
Fortunately, there are plenty of mortgage options that come with reduced down payments. And if you’re a veteran or live in a rural area, you may be able to buy a house with no down payment whatsoever. This article will explain how to buy a house with no money down.
Can You Buy A House With No Money Down?
A down payment is a certain amount of money you pay upfront toward your mortgage. This amount is usually expressed as a percentage of the total loan amount.
Many lenders prefer a 20% down payment because it reduces the risk that you’ll default on your mortgage. That means if you take out a $300,000 mortgage, you’ll pay $60,000 upfront.
A 20% down payment will lower your monthly mortgage payments and let you avoid taking out private mortgage insurance (PMI). However, it is possible to buy a house with no money down.
Some loans qualify for zero or low down payments. The government offers multiple options for borrowers that can’t afford a 20% down payment, though there are trade-offs to consider.
What Is A No Down Payment Mortgage?
A no down payment mortgage is a home loan you can get without a down payment. It can take years to save for a down payment, so no down payment mortgages make it easier for borrowers to afford a home.
No down payment mortgages are only available on government-backed loans. These loans are issued by private lenders and insured by the federal government. It’s less risky to the lender because the government foots the bill if you stop making your mortgage payments.
The government offers no down payment mortgages to individuals who need financial help to buy a home. These programs make mortgages available to people with poor credit and borrowers who can’t afford a down payment.
Two government programs offer no down payment home loans: the USDA and the VA. Both loans have a specific set of criteria you need to meet to qualify.
First-Time Home Buyer Loans With Zero Down
If you’re a first-time home buyer, the following programs will let you buy a house with zero-down or low down payment options.
If you’re a veteran or active-duty service member, you may qualify for a VA loan. VA loans are backed by the Department of Veteran Affairs and are an excellent option if you want to buy a home without a down payment.
One of the biggest advantages of taking out a VA loan is that you won’t have to purchase private mortgage insurance. Instead, you’ll pay a one-time VA funding fee that’s 2.3% of the entire loan amount. If you take out an additional VA loan with no down payment, the funding fee rises to 3.6%.
To qualify for a VA loan, you must have a credit score of at least 580. You also must meet the following requirements:
- Served 90 consecutive days of active service during wartime
- Served 181 straight days of active service during peacetime
- Served for more than 6 years in the National Guard or Reserves or at least 90 days under Title 32 orders, with at least 30 consecutive days
- You were discharged with a service-related disability
- You’re the spouse of a service member who died in the line of duty or from a service-related disability
A USDA loan is a zero-down mortgage backed by the United States Department of Agriculture. At this time, Rocket Mortgage® doesn’t offer USDA loans.
The government offers these loans to encourage people in rural areas to buy homes. However, the USDA is generous with its definition of a “rural” home, and you may find a home in a suburban neighborhood that qualifies.
You can take out a USDA loan with no money down, and these loans typically come with lower fees. But before you apply, you need to see if your home is in a qualifying area.
You can check out the USDA’s map of eligible areas to find out if your home qualifies. On this map, anywhere outside of an orange zone qualifies as a rural area.
In addition, the home must be a single-family unit and cannot be a working farm. You also must live in the home as your primary residence – USDA loans cannot be used to purchase rental properties.
You also must meet specific financial requirements to qualify. Your gross household income cannot exceed 115% of the median income in the county the home is located in. Your debt-to-income ratio can’t exceed 45%, and you must have a FICO® Score of at least 640.
Low Down Payment Options For First-Time Home Buyers
FHA loans are backed by the Federal Housing Administration and only require a 3.5% down payment. These loans are available for individuals with low to moderate incomes.
Because you have to pay a partial down payment, FHA loans have fewer requirements than USDA or VA loans. To qualify for an FHA loan, you must plan to use the home as your primary residence. The home must also meet livability standards, and you have to move in within 60 days of closing.
However, if your down payment is less than 10%, you will have to pay for mortgage insurance throughout the life of the loan. One way to get around these requirements is to take out an FHA loan, build 20% equity in the home, and then refinance to a conventional loan.
A common misconception is that you need a 20% down payment to qualify for a conventional loan. That isn’t necessarily true -- depending on your lender, you may be eligible for a loan with as little as 3% down. However, you will be required to pay for PMI until you reach 20% equity in your home.
Freddie Mac Home Possible® Loans
If you qualify for a Freddie Mac Home Possible® mortgage, you take out a loan with a 3% down payment. This loan program is designed to help low-income borrowers, and is available to borrowers with less-than-ideal credit.
You can use a Freddie Mac Home Possible® mortgage to apply for a fixed-rate or variable-rate loan. And unlike FHA loans, you can cancel the PMI once you reach 20% equity in your home.
First-time home buyers are required to take a home buyer education course to qualify. Freddie Mac considers anyone who hasn’t owned a home in the last 3 years a first-time home buyer.
Down Payment Assistance Programs
If you don’t qualify for any of the programs outlined in this article, there are also down payment assistance programs you can look into. Down payment assistance is any program that provides borrowers with money toward their down payment. DPA grants, DPA loans, and the Good Neighbor Next Door program are all popular down payment assistance programs.
Pros And Cons Of Buying A House With No Money Down
Here are the pros and cons of buying a house with no money down.
- It makes it easier for new home buyers to purchase a house
- Frees up money to put toward other home buying costs and closing costs
- More affordable options for becoming a homeowner
- Keep more money in your bank account for emergencies or home improvements
Buying A House With No Money Down FAQs
What credit score do I need to buy a house with no money down?
The minimum credit score required to purchase a home with no money down will vary depending on your lender. In general, most lenders require a down payment of at least 620. But you can take out a VA loan if your credit score is at least 580.
Can I use a cash gift toward a down payment?
Most lenders allow borrowers to pay their down payment with gifted funds, as long as you plan to use the home as your primary residence. However, you must be able to verify that the funds are a gift. And the money must come from an acceptable source, like a family member.
Are there benefits of putting more money down?
There are many benefits to making a larger down payment on your home. The more money you pay upfront, the less you will have to borrow. That means your monthly mortgage payments will be smaller.
And most lenders will require you to take out PMI if your down payment is less than 20%. PMI can be expensive, and it’s hard to get rid of. You want to try to avoid it wherever possible.
The Bottom Line: You May Qualify To Buy A House With No Money Down
For many borrowers, the down payment is one of the biggest barriers to buying a home. It can take years for most people to save up thousands of dollars to put toward a down payment. Fortunately, there are ways you can buy a home with low to no down payment.
If you’re just getting started, read more about how the process of buying a house works. That way, you’ll understand your options and can make the best decision for your family.