Historically, mortgage lenders have expected buyers to produce down payments of between 10 and 20 percent of a home’s value when purchasing a house. Lenders used this requirement as a screening tool. Buyers with strong down payments were considered more responsible, reliable, and less likely to default.
Yet large down payments aren’t right for every buyer or every situation. Increasingly, lenders and loan programs recognize this. Many even offer no down payment mortgage options.
Here’s what every buyer needs to know about no money down mortgages and how to secure one.
Zero-Down Mortgage Basics
Prospective homebuyers can secure no down payment mortgages from public loan programs and private lenders. Public programs that offer these types of mortgages include USDA loans and VA loans.
Other public programs offer mortgages for as little as $100 down or three percent of the home’s price. Examples include:
Most homeowners who take out no down payment private lender mortgages do so by using money gifted to them in place of a traditional down payment.
How to Qualify
Across all zero-down mortgage options, two criteria are consistent. Borrowers must demonstrate that they have high credit scores and steady income. Lenders look at household income-to-debt ratios to ensure that buyers will be able to meet their loan obligations over time.
Moreover, where lenders accept lower credit scores or incomes, they compensate by using other criteria that imply reliability and stability. Federal programs such as the Good Neighbor Next Door Program, for instance, use employment in social service fields as an eligibility component. Applicants must hold one of the following jobs:
- Law enforcement officer
- Emergency medical technician
Private Mortgage Insurance
Another common requirement in no down payment mortgages is private mortgage insurance (PMI). PMI is a form of insurance that homebuyers take out when they purchase a home. If borrowers default on their mortgage, the PMI policy allows lenders to recoup their loss.
Homebuyers can pay for these policies:
- At closing with their closing costs
- Upfront at the time of purchase
- Monthly as part of their standard mortgage payment
However they choose to pay, PMI does not offer protections for the homeowners paying for it. Understanding and calculating PMI costs when applying for and selecting a mortgage program or lender is essential. Failing to do so can cause buyers to choose loans or properties they cannot truly afford.
No Down Payment Mortgage Options
USDA loans are a popular choice among zero-down mortgage options. Chief pros of the program include:
- 100 percent financing available
- “Low to moderate” income requirements
- No caps on the total home purchase price
- Ability to roll repair and renovation costs into loans
Noteworthy cons of the program include:
- Income qualification limits
- Limitations on what properties qualify for loans
- PMI is mandatory
VA loans are available only to:
- Active duty U.S. military service members
- Qualifying surviving spouses of the above
- Zero down payment required
- No PMI required
- No total loan limits apply
- Requirements that the purchased home be the primary residence of and occupied by the buyer or their spouse
- Funding fees may apply
- VA rules limit the total amount the agency can guarantee which may leave a portion of the loan un-guaranteed
Private lender mortgages obtained using gifted down payments offer a range of benefits.
- Buyers may be able to access the same good terms that they would if they made their own down payment
- PMI often is not required
- Less money gets rolled into the mortgage for long-term repayment
Potential drawbacks include:
- Legal problems if buyers attempt to pass gifted money off as their own
- Financial problems if the individual gifting money perceives it as a loan rather than a gift
- Extra steps in the mortgage application process to document the gift
Low Down Payment Mortgages
Low down payment mortgages can walk an appealing middle ground between standard mortgages and zero-down mortgages. With requirements as low as three percent, these mortgages can enable buyers to:
- Purchase $150,000 homes for as little as $4,500 down
- Enjoy paying for homes themselves with a minimum of saving or waiting
- Choose from a wide range of mortgage lenders and terms
It is important for all buyers to keep in mind that while not producing a down payment can be appealing, down payments are only one of many factors to consider in the home buying process. Understanding the role and value of a down payment can keep decisions in perspective and promote good choices.
Down Payment Value
Zero-down mortgages can enable buyers to purchase a home when they would otherwise be unable to. Consequently, such mortgages can also help buyers keep more money in their pockets for unexpected home expenses, emergencies, and other costs. There is a tremendous appeal to that for most buyers.
Nevertheless, qualifying for a mortgage that requires no money down does not mean that skipping a down payment is in a buyer’s best interest. Down payments still signal to lenders that borrowers are at lower risk of default and this often translates into better loan terms such as:
- Increased buying power
- Lower interest rates
- Lower monthly mortgage payments
- No need to buy PMI
- More equity in a home upfront
Individuals seeking to buy a home who can afford a down payment may find that even a small one can positively impact the:
- Loan terms available to them
- Total expected costs over time associated with their sale
- Speed and smoothness of their home buying process
Each situation is unique, and all factors should be considered before making a decision.
Making the Right Choice
Determining whether a no down payment mortgage is the right choice can be a challenge. Working with experienced real estate agents can shed light on local conditions, expectations, and options. Contact us today and let our expert agents provide the insight and support you need to make the right choice for your situation.