The down payment can be one of the biggest obstacles to homeownership. Even in a very modestly priced market, a traditional 20 percent down payment easily amounts to tens of thousands of dollars. Add the various closing costs and a typical home shopper can face a financial goal that is unrealistic at best. [Source: US News]
If you’ve got limited cash on hand for a down payment but feel otherwise ready to take on the responsibilities of homeownership, you may only need to find the right program to meet your needs rather than give up on your goal.
What Are the Pros and Cons of Making a Down Payment?
Before you jump into a low or zero down mortgage, carefully consider the possible advantages and disadvantages first. If you are able to make even a small down payment, you will probably save money in the long run.
A down payment offers several advantages, including lower borrowing costs. For one thing, you’ll save on interest charges simply by borrowing less money. The lower the down payment, the higher the risk you are to the lender. Because of this, most lenders offer better rates to borrowers who make more sizeable down payments. Even a 1 percent reduction in your interest rate can net you tens of thousands of dollars in interest savings over the life of the loan.
A higher down payment can eliminate the requirement to purchase private mortgage insurance (PMI), reducing your monthly out-of-pocket costs. It also makes homeownership more affordable by virtue of the simple fact that if you borrow less, your monthly payments are lower.
For investment-conscious borrowers, the decision whether to make a down payment may be based on an evaluation of other investment opportunities. For example, if your options are to either make a large down payment against a 5 percent mortgage or leave the cash in a certificate of deposit account earning 2.5 percent, it may make the most financial sense to apply the funds to the mortgage and net greater savings rather than modest earnings.
| Down payment size benefits, assuming the same purchase price | |
|---|---|
| 20% or more | Less than 20% |
| Lower interest rates | Get into homeownership sooner |
| Lower monthly payments | Less cash needed to take out the mortgage (but total loan costs will be higher) |
| No PMI | Any cash reserves remain liquid and available for emergencies, maintenance, investments or other expenses. |
| Lower closing costs | |
The Down Payment Requirement Myth
Low and no down payment mortgages exist because a low down payment is not in itself a precursor to default. Indeed, low down payment mortgages have helped millions of borrowers become homeowners, and the lack of a down payment should not be a permanent deterrent.
Unfortunately, myths surrounding the down payment do prevent some borrowers from pursuing homeownership. A National Association of Realtors Aspiring Home Buyers Profile from February 2017 revealed that 22 percent of nonowners believed that they needed a down payment of at least 10 to 14 percent to buy a home (including 39 percent who believed they needed 20 percent or more).
In fact, although most mortgages require a down payment in some amount, 20 percent is far from standard. While it’s true that the most favorable terms are generally reserved for well-qualified applicants who can make a 20 percent down payment, you can take advantage of various mortgage programs that require far less.
First-time buyers between July 2016 and June 2017 typically financed 95 percent of the purchase price, according to the Aspiring Home Buyers Profile data. These buyers made a down payment of just 5 percent. In 2016, the average down payment for all mortgages in the U.S. was 11 percent, and for borrowers younger than 35, less than 8 percent.
Zero Down Payment Mortgage Options
Zero down payment mortgages open the door to homeownership to many borrowers who would not otherwise be able to purchase a home.
Whatever your reasons for seeking a mortgage with no down payment, here are a few options you can explore. An experienced lender or mortgage broker can help you navigate the features of the various programs and help you choose the best one.
VA Loan
A VA loan is a mortgage made by a lender and guaranteed by the U.S. Department of Veterans Affairs. It is available for the purchase of a home for your own personal occupancy if you are a current or former member of the military, including some reservists, National Guardsmen and surviving spouses. You must provide a certificate of eligibility, which can be obtained online.
[Read: Best VA Loans.]
Andrew Paul, vice president of United Military Lending, specializes in VA loans. “Income and credit standing are what tell the lender a borrower is well-qualified,” he says. “There is no inherent red flag in a zero down payment.”
Fees
Fees for VA loan include an upfront funding fee of 2.15 percent (3.3 percent for repeat VA loan borrowers). Some borrowers are exempt. For those who are not, the fee can be added to the loan balance. VA loans do not have an ongoing private mortgage insurance requirement.
Down Payment
VA loans are available with up to 100 percent financing (zero down).
Credit Score
The VA loan program does not set a minimum credit score, but most lenders do. Expect to find minimum credit score guidelines in the 620 to 640 range, although some lenders may allow a lower score.
Loan Limits
There is no limit on the amount you can borrow with a VA loan, but there are limits on how much the VA will guarantee. Those limits are set by the Federal Housing Finance Agency, and are called conforming loan limits. This year, most U.S. counties have a conforming loan limit of $453,100 for a single-unit property. Higher-cost markets have limits up to $721,050.
“You can buy a home at a price that exceeds conforming loan limits if you bring in a down payment,” Paul explains. “In that case, you need to make a down payment of at least 25 percent of the amount that exceeds the county limit. In other words, if your limit is $453,100, you can still use a VA loan to buy a home for $553,100 if you have a down payment of $25,000 (25 percent of the $100,000 that is above the limit).”
USDA Loan
USDA loans are mortgages made by lenders and guaranteed by the U.S. Department of Agriculture. They are available to moderate- and low-income borrowers to build, rehabilitate, improve or relocate a primary residence in eligible rural and suburban areas. The income limit is 115 percent of the median income in your area. You can check the income limits for your area here.
“The USDA loan is a great option anywhere it applies,” says Carl Kahn, operations manager for Mann Mortgage in San Diego. “It can be closed with zero down. USDA loans do have a monthly insurance requirement, but the upfront fee is significantly lower than on the VA loan and the mortgage premiums are lower than on the FHA loan. The problem is that the number of buyers who qualify for a USDA loan is much smaller. Unlike on other loans where more income is better, a USDA loan has strict income maximums.”
Fees
USDA loan borrowers pay an upfront fee of 1 percent of the loan amount, and this fee can be added to the loan balance. Borrowers also pay a mortgage insurance premium of 0.35 percent of the loan balance per year in 12 equal installments. This fee is based on the current balance and added to the monthly payment.
Down Payment
USDA loans are available with up to 100 percent financing (zero down).
Credit Score
There is no minimum credit score for a USDA loan, but you are automatically ineligible if you are presently delinquent on a nontax federal debt. Automated approval is available if you have two tradelines reported on your credit history and a credit score of 640 or higher. If you do not have sufficient credit data, the underwriter can assess your creditworthiness other ways, such as by examining your history with rent payments. Applicants with a credit score lower than 640 will undergo additional underwriting steps.
Loan Limits
USDA loans are subject to limits that are set county by county and currently range from $117,800 to $576,840. Most counties’ limits are between about $120,000 and $250,000. Also, the home you purchase must generally be 2,000 square feet or less.
Other Zero Down Payment Mortgage Programs
VA and USDA loans are not the only zero down payment mortgage options. If you don’t meet the requirements for those programs, you may be able to find another.
Special Programs
Special programs help certain classes of borrowers get into homeownership. For example, many banks across the country participate in the Doctor Loan Program, and some offer zero down options.
The Doctor Loan Program, or physician loan program as it is called by some lenders, is a mortgage program for certain physicians, dentists, residents and fellows who are just starting out, often with little or no money saved and large student loan balances. The down payment requirement is typically between zero and 10 percent, and no PMI is required.
Fifth Third Bank offers a zero down payment mortgage with no private mortgage insurance to medical doctors, podiatrists and doctors of osteopathy in Florida, Georgia, Indiana, Kentucky, Michigan, North Carolina, Ohio, South Carolina, Tennessee, West Virginia, Wisconsin, Pennsylvania and Illinois. Applicants must have a credit score of at least 700 and may borrow up to $500,000.
Credit Unions
A number of lenders offer their own zero down payment mortgage products, notably credit unions. In most (but not all) cases, loans are only available to credit union members, so you would need to check membership eligibility requirements. Below are a few examples of credit unions, large and small, that offer zero down payment mortgages.
Qualifying for a Zero Down Payment Mortgage
In order to qualify for a zero down mortgage, you’ll need to meet the eligibility requirements of the program and satisfy underwriting guidelines (debt-to-income ratio, employment history, etc.).
“You’ll need to fit in the box the loan was made for,” explains Kahn. “VA loans are great but not everyone is eligible. USDA limits the areas where you can buy and has strict caps on how much you can earn.”
In most cases, the better your credit score and history, the more likely you will be approved for 100 percent financing. The best way to start your home buying journey is to check your credit and start cleaning it up if necessary.
To achieve good credit, you need to pay all of your bills on time and avoid carrying debt. If you accomplish just these two things, you should find yourself on solid footing.
| Lender | Alliant Credit Union |
| Max loan amount | $500,000 |
| PMI required | No |
| Loan eligibility | First-time buyers except in FL and NV |
| Minimum FICO score | 740 |
| Cash that may be required at closing | Two months’ mortgage payments in reserve |
| Notes | Well-qualified applicants; maximum 40 percent DTI. Borrower must complete an online first-time homebuyer homeownership education course prior to closing. |
| Credit union membership eligibility | Live or work in a qualifying community; employees and retirees of select organizations; members of select organizations; relatives of Alliant members; contributors to Foster Care to Success (nonprofit helping college bound foster youth) with a $10 donation or more |
| Lender | NASA Federal Credit Union |
| Max loan amount | $1 million and more |
| PMI required | No |
| Loan eligibility | For the purchase of a primary residence in CO, CT, DC, DE, MA, MD, ME, MN, NC, NH, OR, PA, RI, TX (new purchases only), VA, VT, WA and WV |
| Minimum FICO score | Not disclosed |
| Cash that may be required at closing | Not disclosed |
| Notes | Well-qualified applicants; conforming and jumbo loans |
| Credit union membership eligibility | Current and former NASA employees; members of more than 800 approved area businesses and several associations; family and household members of members |
| Lender | Navy Federal Credit Union |
| Max loan amount | $1 million |
| PMI required | No |
| Loan eligibility | First-time buyers; nationwide |
| Minimum FICO score | Not disclosed |
| Cash that may be required at closing | 1 percent origination fee can be waived for 0.25 percent increase in rate |
| Notes | Conforming and jumbo loans |
| Credit union membership eligibility | Active-duty military, guardsmen, DEPs, ROTCs, reservists, veterans, retirees, annuitants; DOD civilian employees, contractors, civilian retirees and annuitants; family members of current members |
| Lender | Orange County’s Credit Union |
| Max loan amount | $500,000 |
| PMI required | Yes |
| Loan eligibility | California primary residence only |
| Minimum FICO score | 720 |
| Cash that may be required at closing | No closing cost option can minimize or eliminate the need for cash for nonrecurring closing costs. |
| Notes | Not limited to first-time buyers; no upfront loan fees such as credit report, appraisal or application fee |
| Credit union membership eligibility | Anyone who lives or works in Orange or Riverside Counties in California or the neighboring communities of Long Beach, Cerritos, Signal Hill and Lakewood; family members of current members |
| Lender | San Francisco Credit Union |
| Max loan amount | $2 million |
| PMI required | No |
| Loan eligibility | Primary residence; must work in San Francisco or San Mateo County and buy a home in any of the nine Bay Area counties |
| Minimum FICO score | Not disclosed |
| Cash that may be required at closing | Taxes and insurance; $1,700 origination fee plus 1 percent of loan amount |
| Notes | 5/5 ARM with 2 percent rate adjustment cap and 6 percent lifetime cap |
| Credit union membership eligibility | Individuals and family members who work in San Francisco or San Mateo County |
| Lender | Travis Credit Union |
| Max loan amount | $500,000 |
| PMI required | Yes |
| Loan eligibility | California primary residence properties only |
| Minimum FICO score | 720 |
| Cash that may be required at closing | Taxes and insurance |
| Notes | This loan is structured as a piggyback loan (two mortgages taken simultaneously to cover the purchase price of the home). |
| Credit union membership eligibility | Twelve-county area of Northern California (Solano, Yolo, Contra Costa, Merced, Napa, Alameda, Colusa, Placer, Sacramento, San Joaquin, Sonoma, Stanislaus); military and civilian personnel of Travis Air Force Base; immediate family members of current members |
1 Percent Down Payment Mortgage Options
Some lenders offer 1 percent down payment mortgage programs. Restrictions and limitations apply in all cases, so review any loan offer carefully for caveats.
Guild Mortgage
Guild Mortgage offers a 1 percent down payment mortgage to eligible applicants with a FICO score of 680 or higher. For most buyers, your income may not exceed 100 percent of the median income for the area. Guild Mortgage will gift an additional 2 percent of the purchase price, resulting in 3 percent starting equity for the buyer. A homeownership education course is required.
[Read: Best Mortgage Lenders.]
Loans may not exceed conforming loan limits. Mortgage insurance and homebuyer education are required.
This loan program is backed by Fannie Mae. “What sets this loan apart from other 1 percent down payment products is that Fannie Mae does not allow premium pricing,” says David Battany, executive vice president of capital markets for Guild Mortgage. “In other words, the lender is not allowed to raise your interest rate because you are making a low down payment. You’ll pay the same rate as a borrower paying 10 percent down on the same loan.”
United Wholesale Mortgage
United Wholesale Mortgage offers wholesale mortgages to brokers and lenders, not directly to borrowers. It offers a 1 percent down payment program to eligible borrowers buying Fannie Mae HomeReady-eligible properties. UWM contributes grant funds of up to 2 percent of the purchase price, or $5,000 maximum. The borrower may need to make a down payment larger than 1 percent if the $5,000 maximum grant is less than 2 percent of the purchase price (a total of 3 percent down is required). The minimum FICO score is 720, and income limits apply.
Low Down Payment Mortgage Options
If you can swing a down payment of any size, your loan options may be much broader. You will also save on interest charges if you are able to pay your closing costs in cash rather than roll them into your loan.
“If you’ve got 3 to 5 percent to put down, you can talk about options with your broker,” says Paul. “Rates and costs are sensitive to down payment size and credit score. If you’ve got some cash and great credit, a conventional loan will be better for you than an FHA loan. If you’ve got a higher debt-to-income ratio, the FHA loan might be the better loan.”
Piggyback Loans
A piggyback loan is two loans taken at the same time to cover a substantial portion of a home’s purchase price. It’s often used by those who have less than 20 percent to put down on a home.
A piggyback loan can help you lower the amount of cash you need to purchase a home and avoid private mortgage insurance at the same time. You’ll need this insurance if you’re putting less than 20 percent down. PMI can add hundreds of dollars to the monthly payment (depending on the loan balance).
A piggyback loan can also help you stay under conforming loan limits, which can make it easier to qualify for a government-backed loan.
Piggyback loans typically require a down payment. A common scenario is to make a 10 percent down payment and take a first mortgage for 80 percent of the purchase price, and a piggyback loan for the remaining 10 percent.
FHA Loans
The Federal Housing Administration guarantees FHA loans. These are popular because they tend to be more flexible than other loans when it comes to qualifications (particularly where credit score is concerned). They require a down payment of 3.5 percent and a credit score of 580. If your credit score is lower but at least 500, you will need to make a 10 percent down payment.
[Read: Best FHA Loans.]
FHA loans are subject to conforming loan limits. Private mortgage insurance is required upfront and for the life of the loan.
Conventional 97 Loans
The Conventional 97 loan program is offered to first-time buyers by Fannie Mae for the purchase of a primary residence and requires a down payment of 3 percent. Private mortgage insurance is required until you have at least 20 percent equity in the home. Funds from gifts, grants and other sources may be used toward the down payment and closing costs.
This program is designed for applicants with a credit score of at least 680, but some lenders might allow a lower score.
HomeReady Mortgage
The HomeReady program is offered to low- and moderate-income borrowers by Fannie Mae to purchase or refinance a principal residence. It requires a 3 percent down payment and private mortgage insurance. You can terminate your private mortgage insurance once you reach 20 percent equity. Gifts, grants, Community Seconds mortgages and cash on hand are all allowable sources of down payment and closing cost funds. Homeownership education is required.
This program is designed for applicants with a credit score of at least 680, but some lenders might allow a lower score.
Home Possible Advantage
Home Possible Advantage is a purchase and refinance (no cash-out) mortgage program offered by Freddie Mac to borrowers who do not own any other residential property (some exceptions apply). A down payment of at least 3 percent is required. Mortgage insurance is required but can be canceled once sufficient equity is established (18 to 25 percent, depending on the loan).
For most borrowers, income may not exceed 100 percent of the median income for the area. Borrowers buying a home in an underserved area are exempt from the income limit. The loan must be for a one-unit primary residence, and not a manufactured home. Homebuyer education is required.
This program is designed for applicants with a credit score of at least 660.
Good Neighbor Next Door
The U.S. Department of Housing and Urban Development’s (HUD) Good Neighbor Next Door program is for eligible teachers, law enforcement officers, firefighters and emergency medical technicians. Eligible buyers can purchase a HUD-owned single-family home for 50 percent off the appraised value of the home. The required down payment is as low as $100, and the buyer must live in the home for at least three years. The discounted amount is represented by a second mortgage that is forgiven after the occupancy requirement is completed. If you don’t complete the occupancy requirement, you will be responsible to repay the second mortgage on a prorated basis.
Guaranteed Rate
Guaranteed Rate offers the Give 2 You program. The borrower must make a 3 percent down payment and Guaranteed Rate will gift up to 2 percent of the purchase price, $7,500 maximum. The minimum FICO score is 680, the loan may not exceed conforming loan limits, and the borrower’s DTI may not exceed 45 percent. Income and property type limits apply, and homeownership counseling is required of first-time buyers.
How Can You Get Down Payment Assistance?
Programs exist nationwide to help qualified borrowers get the down payment they need to purchase a primary residence.
“Many down payment assistance programs treat the funds as a grant if you remain in the property but a loan if you sell,” explains Kahn. “They also may be set up to incentivize buyers to move to certain areas.”
Examples of down payment assistance programs available:
- In Denver, the Metro Mortgage Assistance Plus Program offers a grant of up to 4 percent of the loan. Borrowers’ income must not exceed limits, and a down payment of 0.5 percent may be required.
- In San Diego, first-time buyers who earn no more than 80 percent of the area median income can apply for a grant of up to $10,000. Transactions are subject to various other limitations, including property type and purchase price.
- In Michigan, first-time homebuyers statewide and repeat buyers in targeted areas who have a credit score of at least 640 can apply for a zero percent down payment assistance loan of up to $7,500. When the home is sold or refinanced, the loan must be repaid in full. The borrower must make a down payment of 1 percent.
- In Cleveland, qualified buyers can receive a deferred loan for up to 17 percent of the total transaction cost (purchase price plus 5 percent closing costs). The borrower must contribute at least 3 percent of the total transaction cost. Fifty percent of the deferred loan balance will be forgiven after 10 years of occupancy, and the balance need not be repaid until sale or transfer. For some properties, the loan converts to a grant after five years of occupancy.
- In California, the GSFA Platinum down payment assistance program offers low- and moderate-income borrowers a nonrepayable gift of up to 5 percent of the home value for the purchase or refinance of a primary residence. The minimum FICO score required is 640, and the maximum debt-to-income ratio is 50 percent. “Some borrowers will need to come in to this loan with 0.5 percent down,” notes Kahn.
Do You Need Cash to Close?
The need for some cash to close a mortgage is not a myth, generally speaking. Loans that allow a borrower to purchase a home without a single dollar out of pocket are not the norm. Closing costs may total 3 to 5 percent of the purchase price and include:
- Origination fee
- Application fee
- Broker fee
- Discount points (or mortgage points)
- Third-party fees (including appraisal, inspection, title report, title insurance, credit report, flood certification, survey and other fees)
- Prepaid items (including homeowners insurance, property taxes, prepaid interest)
- Underwriting fee
- Document preparation fee
Some lenders offer to pay some fees, perhaps in exchange for a higher interest rate on the loan. Certain programs allow the fees to be added to the loan balance so that they are not due at closing (you’ll then pay interest on the fees for the life of the loan).
You can find creative ways to lower your out-of-pocket costs. For example, down payment funds can be gifted to you by a family member, and you can ask the seller to offer concessions (seller credits) toward your closing costs.
When Is a Zero Down Payment Mortgage a Good Idea?
A zero down mortgage is a great option for a homebuyer who has limited cash on hand but is otherwise well-qualified to buy a home.
“Income and credit standing are much greater indicators of readiness for homeownership than down payment size,” says Paul. “A member of the armed forces on active duty has a very stable income, a guaranteed paycheck with almost no chance of job loss. VA loans outperform many other kinds of low down payment loans.”
If you’ve got no plans to sell for at least the first few years, you’re willing and able to take responsibility for the upkeep of the home and you have steady income, a zero down payment mortgage could get you into homeownership years sooner than you could if you had to save for a down payment.
When Is a Zero Down Payment Mortgage a Bad Idea?
A zero down mortgage may not be a good option for a borrower who can make a down payment and save money in the long run as a result. Upfront costs and the loan’s interest rate tend to be inversely proportional to the down payment. The more you can put down on a home, the better the terms will be and the less you’ll pay overall.
A zero down payment mortgage is not a good idea in a declining market. If you make no down payment and your home’s value goes down, you will be underwater (you’ll owe more on your home than it is worth in the current market).
You’ll also lose out if you sell in the near future. You need to factor the break-even point (the point at which your equity exceeds both your cost to buy and your cost to sell). This could easily be five years into the loan. If you sell sooner, you’ll lose money.
Finally, a zero down mortgage is not a good financial move for someone who is unable to set aside any money at all on a regular basis. You’ll need some budgetary discipline to be a homeowner, or you could face a serious financial emergency when the home needs maintenance. You won’t be eligible for a home equity loan until you have sufficient equity (often you need 20 percent equity after the loan closes), which will likely be nine to 12 years, depending on your interest rate.
How Can You Find the Right Low Down Payment Mortgage Lender?
Virtually all mortgage lenders offer multiple loan products to meet various borrower needs, including low down payment loans. The VA, USDA and FHA loan programs, for example, are offered by lenders nationwide. When you are ready to apply, shop around with large and small lenders and get multiple loan offers. Interest rates and costs vary from one lender to the next, and even small differences can add up significantly over the life of the loan.
Start with a good understanding of your budget. Homeownership costs are typically higher than renter costs. You’ll be responsible for new expenses like property taxes, homeowners insurance and all of the maintenance on the home you buy. Some buyers will need to also budget for homeowners association fees. Even if a lender or broker tells you that you can afford a certain payment, it needs to be one that you are comfortable with. The pain of financial hardship can be great, but no one ever complains about having plenty of money each month. [Source: US News]
