How To Get A Mortgage With No Downpayment

Buying a home can be a complicated process, and getting started can be tough. Many people are intimidated by the idea of saving up thousands of dollars for a down payment. However, you may be able to move forward with the home-buying process without dropping that big lump sum. Take a look at how this could work for you.

Why Would You Get a Mortgage Without a Down Payment?

Putting a certain percentage of the cost of your new home down at the beginning of the purchase has become common practice in American real estate. The standard is often 5%-20%. For a $200,000 home, this equals anywhere from $10,000 to $40,000. Many people who hope to own a home have trouble saving this kind of money while managing everyday bills and saving for emergencies.

Other buyers may have a substantial amount of money saved but find that they need it for other parts of the home purchase. Buying a home comes with fees and expenses such as inspections, closing costs and agent fees. It may be easier for a buyer to get a mortgage with no money down and put their funds towards these other costs.

How Do You Get a Mortgage Without a Down Payment?

Down payments have become the standard, but there is no law requiring them. Every lender issuing mortgages ultimately decides whether to require a down payment from an individual borrower. The lender also decides how the down payment affects other loan terms, such as interest rates.

FHA Loans

One of the best options may be a loan from the Federal Housing Administration. FHA loans are designed for home buyers who have less-than-ideal financial circumstances and need a bit of help. They come with easier credit requirements and lower closing costs.

FHA loans do have a low down payment requirement, though it can be as low as 3.5%. However, a borrower can pair this government-backed loan with different programs for down payment assistance. Local, state and federal government organizations offer grants and other aid that can be used to cover the down payment cost and make your loan practically down payment-free.

To get the best help with your FHA loan, work with a loan officer who is well-versed in the types of programs available in your area and what you will qualify for based on your circumstances.

VA Loans

For qualifying people, Veterans Affairs loans can get you into a new home with no down payment. These loans are issued through the Department of Veterans Affairs and are only available to current and former service members. For former military members, there are minimum service requirements and you will need a proper discharge.

A VA loan gives you access to low interest rates even with no money down. You will need to make sure the sale price of the home you want to buy is equal to or lower than the appraisal value. If you try to take out a loan for more than what the house is appraised for, you may have difficulty closing the deal without a down payment.

When using a VA loan, plan on having some money on hand to pay a funding fee that is attached with this type of financing.

USDA Loans

The U.S. Department of Agriculture also runs a loan program. It is designed to give people with lower incomes a path to owning a home. To facilitate this, the program gives the option to bypass a down payment. The loans are also generally low interest, helping people keep costs low. Grants and other funds can further help mitigate the costs of the additional home-buying fees.

There is a list of requirements for getting a USDA loan. First, these loans are targeted at people who want to live in more rural areas. There are certain geographical areas where buyers must live or plan to live to get the loans.

A borrower with a USDA loan must also meet specific financial requirements. Debt-to-income ratios must be at 41% or lower to prove that the borrower can manage their debts well. A home buyer will also need to show that they don't drastically exceed the income level in the area where they are getting the house. This is because the loans are meant for low- to moderate-income buyers.

Private Lenders

There are also private lenders that offer mortgages to people who do not want to pay a down payment. You may find this more often with credit unions that work closely with their members. These types of loans are a bit of a risk for the financial institution, so they are less common than they used to be.

With a no-money-down mortgage from a private lender, you may be subject to a lot more requirements and restrictions. A common request is for the lender to have a relatively high credit score. Expect to need close to a 700 or better to qualify.

Some lenders also only offer to waive the down payment for first-time home buyers. If you've owned property before, the bank may expect you to borrow against that asset to put money down on your new purchase rather than give you a mortgage without a down payment. Interest rates are also likely to be higher without money up front.

What Else Should You Know About Not Making a Down Payment?

If you choose to get a mortgage without a down payment, plan your finances carefully. In addition to the potential for higher interest, you may also have higher monthly payments. A down payment takes a chunk out of the cost of your home, so it lowers your principal payments as well as the amount of interest charged. Without a down payment, you are financing all of the cost of the home.

Finding the best way to get a mortgage without a down payment can make a big difference for potential homeowners who can't overcome the task of saving thousands of dollars. For more help determining which options are right for you, check out the resources at FHA Insider.