How can you buy a house with no money down

Zero Down Mortgages: Are They Right For You?

What is a Zero Down Payment Mortgage?

A zero down payment mortgage is exactly what it sounds like: a mortgage that requires no money down at closing. Buying a home and putting no money down to do it sounds appealing to many, but in reality it’s hard to get a zero down payment mortgage in this climate, as banks no longer offer them to most consumers. Hard, however, doesn’t mean impossible. Here’s how you can score a zero down payment mortgage — and the pros and cons of getting one.

Not everyone will qualify for a zero down payment loan, but in circumstances, you might be able to buy a house with no money down.

If you’re a veteran, you might be able to get a VA loan with no down payment from the U.S. Department of Veterans Affairs (VA). In order to qualify for the loan — you’ll need good credit, enough income and a Certificate of Eligibility from the VA — but if you do, you may be able to enjoy these perks: no down payment on the home (as long as the sales price isn’t higher than the appraised value of the home), no private mortgage insurance premium and limited closing costs.

The second option for a no down payment loan is a USDA loan. The United States Department of Agriculture offers a variety of these loans with low interest rates. Most of the loans are designed to help low- or moderate-income people with decent credit buy a home in a rural area.

Two of the more popular USDA loans are the single-family direct homeownership loan and the single-family guaranteed homeownership loan.

The single-family direct homeownership loan is for low- or very low-income borrowers purchasing homes in rural areas.  Eligible properties must be 1800 square feet or less with a market value below the applicable area limit.  No swimming pools or properties designed for income-producing activities are allowed. The household adjusted income of the borrower must not exceed the applicable low-income limits for the area.

The single-family guaranteed homeownership loan helps those with incomes that are below 115 percent of the median income for the area buy modest homes in rural areas.

If coming up with a down payment is a struggle, an alternative to buying a house with no money down is an FHA loan. The FHA does not offer a no-money down loan. However, they do allow for loans with a down payment as low as 3.5% of the home’s purchase price. Lenders offing a FHA loan are also restricted in the fees they are allowed to charge you.

Pros and Cons of a Zero Down Payment Loan

The perks of a zero down payment mortgage are simple: You can get a mortgage to buy a home without having to put any money down. This means those without savings could buy a home. Though that sounds appealing, it does come with downsides. For one, you’ll have no equity built up in your home at the time of purchase, so you won’t be able to do things such as take out a home equity loan or home equity line of credit if you need to do home repairs or have other expenses you need to take care of. Plus, you’ll likely be paying off this home loan for longer than someone who had put money down would, which means you’ll likely be paying the bank thousands more in interest payments over the life of the loan.

Bottom Line

Most home buyers will need to put down at least 3 to 5 percent or more of the cost of the home to get a mortgage. But no matter what kind of loan you get — with a down payment or without — make sure you can truly afford the mortgage payments and the other costs of homeownership (insurance, repairs, etc.) every month. Use Zillow’s free mortgage calculator to help estimate your monthly mortgage costs or our affordability calculator to determine what you can truly afford.

Buying a home? Find a local lender on Zillow who can help.

Considering a no money down home loan or down payment assistance program? You’ll want to explore the following options.

1.     Research No Money Down Home Loans

Before applying for a zero-down home loan, you’ll need to make sure that you meet the minimum eligibility requirements for the program. Here are some available assistance programs.

USDA Loans

USDA loans are backed by the United States Department of Agriculture and are most commonly utilized by low- and moderate-income home buyers in rural areas. Designed to help spur development in less commercially or industrially built up areas of the nation, USDA loans (which come with lower fees than alternate loan types) can be obtained with zero money down. Note that Rocket Mortgage® is not currently accepting USDA loan applications.

USDA loans typically:

• Require a low minimum credit score
• Come with below-market interest rates
• Have no down payment requirements
• Have cheaper mortgage insurance attached

Of course, USDA loans also come with drawbacks, including household income limits (the combined gross income in your household cannot exceed more than 115% of the median income for the county it’s in) and the guarantee fee. Your debt-to-income (DTI) ratio needs to be under 45%, and your FICO® Score should be a minimum of 640 to maximize chances of qualification. In addition, to qualify for a USDA loan, the property you’re seeking to buy must be in a rural or suburban area, must be a single-family unit, and you must occupy the home as your primary residence.

VA Loans

VA loans come backed by the Department of Veterans Affairs. You may be eligible to receive one if you’re an active-duty servicemember of the U.S. military, member of America’s National Guard, a veteran, or the qualifying spouse of a deceased veteran. Highly sought-after, VA loans allow you to pay a one-time VA funding fee of 2.3% of your loan value (or 3.6% for each subsequent VA loan) instead of mortgage insurance. Upsides of obtaining a VA no money down loan are considerable, including:

• No down payment minimum
• Low minimum credit score requirements - the VA has no minimum credit requirement, but most lenders do. Rocket Mortgage® has minimum credit requirement of 580 for VA loans
• No private mortgage insurance (PMI) needed

As for potential drawbacks of VA loans, keep in mind that the property needs to be your primary residence, and that you’ll need to pay the funding fee to obtain one. Your DTI should be no more than 41%, too. Requirements to qualify for a VA loan are often more stringent than when applying for other zero money down loan types.

2.     Consider Low Money Down Loan Options

If you’re not eligible for a no down payment program, you may be able to apply for a low down payment mortgage option instead.

FHA Loans

FHA loans are backed by the Federal Housing Administration and can be procured with as little as 3.5% of your total loan value down. They’re designed to help aid low- and moderate-income buyers in their quest to attain homeownership, making FHA loans a popular choice among first-time homebuyers. In general, FHA loans come with fewer requirements attached than USDA or VA loans. Sample characteristics of an FHA loan include:

• Low minimum credit score requirements
• Small down payment minimums
• Available to new and existing homeowners

However, as with other low and zero money down home loans, there are potential downsides to consider. For example: You’ll have to live in a property that you purchase as your primary residence, your property must meet certain livability standards, and you’ll have to move in within 60 days of closing. FHA loans also require you to pay private mortgage insurance for the life of the loan if your down payment is under 10%.

Fannie Mae HomeReady Loans

Fannie Mae offers shoppers financing options through its HomeReady program. Under the terms of the HomeReady program, you’ll be able to secure lower monthly payments, and loans with as little as 3% money down. If you choose to get a loan though Fannie Mae’s HomeReady program, you’ll enjoy upsides like low interest rates, reduced PMI, and minimal down payments. But, as with other loan types on this list, you’ll still be required to pay private mortgage insurance, save up for an initial down payment, and meet some key eligibility requirements.

Freddie Mac Home Possible

Freddie Mac’s Home Possible program, which operates similarly to Fannie Mae’s HomeReady program, comes with both upsides and downsides attached. On the bright side, applicants who elect to go with a Freddie Mac Home Possible loan may enjoy benefits such as low down payment minimums, and lower credit score and income requirements. On the flip side though, only certain property types are eligible for home loans under this program.

Conventional Loans

It’s also possible to get a conventional mortgage with a small down payment to finance the purchase of your home. Many lenders will extend a 15-year or 30-year home mortgage on flexible terms, depending on your ability to meet minimum credit score, income, and DTI ratio requirements. Be sure to shop around and compare rates and offers from various financial providers including banks, credit unions and online mortgage firms, as terms will vary by lender. Leveraging a conventional loan in this fashion can help you become a homeowner more rapidly, without having to save up as much up-front.

Keep in mind that you will have to pay PMI if you make a down payment of less than 20% of the purchase price of your home. And, it may also cost you more over the life of the loan, and come with higher interest rates and fees attached, so be certain to crunch the numbers when comparing low or zero down payment mortgage options upfront.

3.     Save Up For A Down Payment

Keep in mind that you may need to save up for a down payment if you’re not approved for a no down payment loan. Of course, if you’re a low- or moderate-level income earner, you may also be able to combine a low down payment loan with a state or federal assistance program to be able to purchase a new home with a smaller down payment. If you are unable to save for a down payment, there are other ways to cost-effectively finance the purchase of a property as well. For instance, you can even use inheritances and financial gifts to buy a house if needed.

4.     Ask The Seller To Help Play Closing Costs

If cash is a concern, you might also consider asking for seller concessions − expenses that the seller will take off your hands or money given back at closing. During the closing process, you can use these concessions as a way to help reduce your closing costs and even chip away at the total amount that you’ll need to purchase the home. Seller concessions are typically awarded through smart negotiation − don’t be afraid to ask for them if you feel you’ve got some leverage in a real estate deal. This tactic may not work if you’re in a seller’s market, though, so be sure to consult your real estate agent to decide the best strategy for you.