Zero-Down Mortgages: A Guide On How They Work

Upfront costs are a common challenge home buyers face when purchasing a home – especially the down payment. Some home buyers can clear that early hurdle with a zero-down mortgage and buy a home with no money down.

Let’s explore how zero-down mortgages work, their pros and cons and answer your frequently asked questions about low- or no-down-payment loans.

What Is A Zero-Down-Payment Mortgage?

A down payment is a percentage of a home’s purchase price that ranges from 3% to 20% or more and gets paid during closing. In most cases, you’ll need to make a down payment to buy a house.

When buying a home, your lender will provide the bulk of the funds, but they’ll require a down payment to ensure you have some skin in the game, too. A down payment is also a strong indicator that a borrower is reliable enough to repay the loan. Most home buyers cover the down payment with their savings, investments, gift money, home equity or housing assistance and grants.

A zero-down-payment mortgage allows a borrower to buy a house with no money down, benefiting buyers who need financial assistance to purchase a home.

Most zero-down mortgages are government loan programs and target home buyers who served in the military or want to live in a rural area. The federal government insures government loans, guaranteeing that lenders are paid back in full or partially if a borrower defaults on a loan.

No-Down-Payment Mortgage Options

The two most common zero-down-payment mortgages are government-backed: Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans. Eligible borrowers must meet specific requirements to qualify for these loans.

VA Loan

VA loans are backed by the Department of Veterans Affairs and issued by private lenders. They’re available to qualifying active-duty and veteran service members and surviving spouses. Service members must meet service and income requirements and have a credit score that meets a lender’s requirement (though the VA has no credit score minimum).

VA loans have no down payment or private mortgage insurance (PMI), and they have competitive interest rates. You pay closing costs and a VA funding fee at the end of the real estate transaction. The funding fee ranges from 2.15% to 3.3%. Borrowers who make at least a 5% down payment pay a reduced fee, and borrowers with service-connected disabilities are exempt from paying the fee.

USDA Loan

A USDA loan is another zero-down-payment mortgage. It’s backed by the U.S. Department of Agriculture and helps low- to moderate-income borrowers buy, build or rehabilitate homes in rural areas.

Your income must be at or below 115% of an area’s median household income to qualify for a USDA loan. You must buy the home as a primary residence in an eligible, USDA-approved location.

As with other mortgages, you must meet a lender’s credit score, debt-to-income ratio (DTI) and income requirements.

Low-Down-Payment Mortgage Options

Zero-down-payment mortgages aren’t the only available options. Home buyers can also take advantage of low-down-payment options to help make buying a home more affordable.

FHA Loan

FHA loans are backed by the Federal Housing Administration and issued by private lenders. You can qualify for an FHA loan with a down payment of 3.5% and a credit score of 580 or higher, or a down payment of 10% with at least a 500 credit score.

In addition to credit score requirements, borrowers meet a lender’s DTI requirements and pay a one-time and annual mortgage insurance premium (MIP). And the property must meet the FHA’s property standards.

Conventional Loan

A conventional loan is backed by Fannie Mae or Freddie Mac and offered by private lenders. Conventional loans are popular among home buyers.

You may qualify with a credit score of at least 620 and a 3% down payment. However, when you put down less than 20%, you pay private mortgage insurance (PMI) until you reach 20% equity in your home.

Fannie Mae HomeReady^®

The Fannie Mae HomeReady loan is available to lower-income first-time and repeat home buyers with smaller savings for down payments. You may qualify for a 3% down payment with a credit score of 620 or higher. Both HomeReady and Home Possible Loans come with a loan level price adjustment (LLPA) credit of 1% of the loan amount up to $3,500. If the loan is below $200,000, the credit will be $2,000 as opposed to 1%. If your income is lower than 50% of the area median, you are eligible to receive a $2,500 grant.

Freddie Mac Home Possible^®

A Freddie Mac Home Possible loan helps first-time borrowers, move-up borrowers or retirees with low or very low income. The down payment requirement is 3%, and your income can’t exceed 80% of an area’s median income.

Down Payment Assistance Programs

You may be able to get help covering your down payment even if you don’t qualify for a zero-down-payment mortgage. First-time home buyers are usually the target borrowers for down payment assistance programs. The programs provide grants or loans (often forgivable) to cover the down payment or closing costs.

Pros And Cons Of Zero-Down Mortgages

Zero-down-payment mortgages offer clear benefits, including lowering the upfront cost of buying a home. However, there are also downsides to consider.

Pros

• The ability to buy a home sooner: It can take some would-be homeowners years to save up for a down payment. A zero-down-payment mortgage can help speed up your timeline.
• Pay less upfront: When you buy a home with no down payment, you get to keep more money in your pocket, potentially eliminating tens of thousands of dollars upfront to buy a home.
• More funds available to cover other costs: A large down payment can leave little room in your budget to spend on other expenses. When you don’t have to worry about a down payment, you have more money to cover closing costs, furnishings and more.

Cons

• No equity in the home: A down payment helps you build immediate home equity. With a zero-down mortgage, you have 0% equity in your home.
• Specific loan requirements to meet: Zero-down-payment mortgages aren’t universally available. The loans typically have specific qualifying criteria, such as being a veteran or living in a rural area.
• A larger loan and higher monthly mortgage payment: When you buy a home without a down payment, you borrow more money. As a result, you’ll have a higher monthly mortgage payment.

Zero-Down Mortgage FAQs

A zero-down-payment mortgage can be a great option, but is it right for you? Here are a few other aspects to consider:

Can I get a home loan with no down payment?

Borrowers can take advantage of loans that allow them to buy a home with no money down. The loans are typically available through the VA and USDA.

In addition to zero-down mortgage options, consider down payment assistance, gift money or negotiating with a home seller or mortgage lender to reduce upfront costs.

What credit score do I need to get a zero-down-payment mortgage?

VA loans and USDA loans offer generous terms. While individual mortgage lenders typically set credit score requirements, the VA and USDA don’t have a mandatory credit score requirement. Most private lenders generally require a score of at least 580 for a VA loan and 640 for a USDA loan.

A high credit score can help you earn favorable loan terms and interest rates – even with a zero-down mortgage. Check with your lender to ensure you meet their credit score minimum.

Are zero-down mortgages a good idea?

If a down payment is standing between you and the keys to your new home and you qualify for a no-down-payment government-backed loan, a zero-down mortgage can be an excellent idea.

Check your eligibility for a zero-down mortgage and research other loan types. You may discover that a conventional loan is better for your needs.

Is there a minimum down payment requirement to buy a house?

Down payment requirements vary by loan program. Your lender or the entity that guarantees the loan establishes the minimum down payment, and your lender sets the loan’s eligibility criteria. Discuss your options with your lender and real estate agent to determine which loan is right for you.

The Bottom Line

A zero-down-payment mortgage allows a buyer to purchase a house without the upfront cost of a down payment. Only a select number of loans allow borrowers to buy a home with no money down, such as VA and USDA loans.

Crunch the numbers to determine which type of loan works best for your situation before choosing a mortgage type. While the zero-down-payment option can be appealing, it’s not always the best option for every borrower.

Are you considering buying a home? Start your application today and see what you qualify for!