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The Zero Down Payment Mortgage: How to Buy a House With No Money

By Chika

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Last Updated: September 7, 2022

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How much cash a prospective homeowner will need to save and spend to get a mortgage is a common concern.

The biggest challenge for first-time home buyers is saving for a down payment as it can take years to save up the lump cash. Lenders require a down payment because it is assumed that the buyer would be less inclined to default because of the upfront payment. 

But did you know that you don't have to need a down payment to purchase a home?

A zero-down mortgage payment allows you to purchase a property without depositing your money. In this article, we'll explore various ways you can achieve your dream of owning a home without having to make a down payment. 

 

 

What is a Zero-Down Payment Mortgage?

As the name implies, a zero-down mortgage is a home loan that allows you to purchase a home without a down payment. Lenders usually calculate your down payment as a percentage of the total amount you borrow.

For example, if the home you intend to buy costs $400,000 and the lender requires you to make a 20% down payment, this means you would have to bring $80,000 to close the deal. However, with a zero-down payment mortgage, you wouldn't need to make any type of upfront payment. 

So you may ask, what's in it for the lender since you would not be committing your money?

Isn't the lender taking a big risk by offering you a house without any form of financial commitment?

Not exactly. Zero-down mortgages are usually backed by the government. As such, the lender does not take all the risk in the case of a default.

This absence of risk encourages the lender to provide you with more favorable loan terms.

However, some lenders offer this type of loan without government backing. This would be examined in detail below. First, let's check out the options for a mortgage with no down payment that is backed by the government.

 

1. Veterans Affairs (VA) Loans

VA loans are provided by private lenders such as banks, credit unions, and mortgage finance companies. These loans don’t require down payments as long as the sales price is at or below the home’s appraised value.

VA loans are usually guaranteed which means that the Department of Veteran Affairs will reimburse the lender in the event of loss due to foreclosure

As the name suggests, this loan is not open to everyone. To be eligible for a VA loan, you must be a veteran, active-duty service member, member of the National Guard, reserve, or the surviving spouse of a veteran.

Other requirements vary based on whether you’re on active duty or a former member of the military if you served or are serving in the National Guard or Reserve, and when you served. 

VA loans usually have no or low down payment requirements, and lower interest rates than traditional mortgage products. These loans also tend to be more flexible, allowing for a higher debt-to-income (DTI) ratio and lower credit scores, and don’t require private mortgage insurance (PMI).

VA loans also allow you to pay a one-time VA funding fee that’s 2.3% of your loan value instead of mortgage insurance. For each subsequent use of a VA loan, the funding fee with no down payment is 3.6%.

Lenders may also have additional eligibility requirements such as a minimum credit score. For more detailed information on the requirements for a VA loan, check here

 

2. USDA Loans

The U.S. Department of Agriculture (USDA) provides homeownership opportunities to low-and moderate-income Americans to live in rural or suburban areas through several loans, grants, and loan guarantee programs.

Loans may be provided directly through USDA, though most are made available as mortgages provided by traditional lenders such as banks with the guarantee of USDA. This scheme which has been in existence since 2007.

There are three types of USDA loans for homebuyers:

Guaranteed USDA Loan

Under this loan scheme, USDA offers guaranteed loans through local lenders. This implies that in the event of default, USDA bears the risk. These types of loans typically suit low- or moderate-income borrowers with low credit scores. 

To be eligible for a guaranteed USDA loan, your adjusted household income can’t exceed more than 115% of the median family income in the designated rural area you wish to live in.

Household income generally includes the combined income of the loan applicant and every adult in the household, regardless if their names are on the loan application.

 

Direct USDA Loan

In this type of loan scheme, the USDA funds the borrowers directly rather than through traditional lenders. Direct USDA loans are favorable for low-income and very-low-income Americans who can’t access traditional mortgage financing. 

 

USDA Home Improvement Loans

These loans help low-income Americans repair or enhance their homes. Depending on your circumstances, USDA may combine these with grants you don’t have to pay back.

Neither of these home loan programs requires a down payment, but you must live or plan to live in an eligible rural area to qualify. See a list of eligible areas here

 

Additional conditions to be eligible for a USDA Loan

In addition to buying a home in an eligible location, borrowers need to meet other requirements which include:

  • The home you're purchasing must be your primary residence
  • Demonstrate your ability to manage debt
  • DTI ratio of 41% or lower

 

3. Zero-Down Home Loans With Private Lenders

Private lenders also offer zero-down payment loans. However, the housing market crash of 2008 has reduced the prevalence of these loans. So it may be difficult getting zero-down payment loans from private lenders in comparison to government-backed loans.

In addition, private lenders require a higher credit score than those required for government-backed loans. 

Some examples of lenders who offer loans with no down payment include North American Savings Bank (NASB) and Navy Federal Credit Union. If you’re exploring this option, be sure to contact the lender directly to learn more details about their offerings before applying.

 

 

Benefits and Drawbacks of a No Down Payment Mortgage

Obtaining a home loan without a down payment may seem like a good deal, but it could also come with some disadvantages. Let's have a look at the pros and cons of zero-down payment loans. 

Benefits

You don't need to wait until you have enough cash saved for a down payment. This saves you time and money, plus frees you from the mental stress that comes with trying to meet up with the down payment. 

Borrowers don't have to worry about paying mortgage insurance in addition to your loan payments.

If it's a government-backed loan, borrowers with low credit scores can be eligible. Plus the lender can give better conditions since the risk of loss through default is lower. 

 

Drawbacks 

If the loan is not backed by a government entity, then it will likely come with a higher interest rate

The lender will typically charge higher origination and funding fees

You typically need a good credit score to be eligible if the loan is not government-backed. 

Photo by Binyamin Mellish

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