How to Buy a House With No Money Down

A down payment is a crucial component of buying a house and can be the biggest obstacle to owning one, especially for first-time homebuyers.

According to NerdWallet Home Buyer Report, 38% of non-homeowners cite a lack of enough down payment as a roadblock to buying a house. But did you know that you can acquire a home with zero down payment? 

You can buy a house with no money down through:

1. A government-sponsored loan.
2. A down payment assistance program (DAP).
3. Low down payment mortgage alternatives.

In this article, I will explain the above options in greater detail. Let's dive right in.

1. Government – Sponsored Loan

The US government offers 2 major loan programs for prospective homeowners, which require no down payment. These are USDA and VA loans. Let's explore them in detail.

USDA Loan

A USDA is a sponsored loan by the States Department of Agriculture designed to support low and middle-income-earning households to own a home. 

The USDA loan program can work in three different ways. The government can:

• Act as a guarantor. The government promises the lender to repay your mortgage if you default on the loan.
• Act as a direct loan lender. If you are not eligible for a mortgage with a bank, the government can fund the mortgage entirely. This option is best if you earn a low income.
• Fund your home renovation. If you already have a home but need to improve it, the government can fund the project through the USDA loan program.

To be eligible for a USDA loan, you must meet the following criteria:

• Be a citizen. Show proof of US citizenship or be a qualified alien.
• Have a source of income. Show proof of a dependable source of income that can enable you to pay the mortgage for at least a year.
• Earn not less than a specific amount. Earn a gross income of less than 115% of the locality's median income.
• Have the property in a rural or suburban area. You can check if your property is located in an eligible area by visiting the USDA's eligibility site. The home must also qualify as a single-family unit and primary residence.
• Have a debt-to-income ratio (DTI) of 41% or lower. DTI is calculated by dividing your monthly expenses (minus food and utilities) by your gross monthly earnings. You can lower a high DTI by paying off debts.
• Prove creditworthiness. It would be best if you had a minimum credit score of 640.

Taking a USDA loan will require you to foot expenses like mortgage insurance, lender fees, and closing costs. However, the lender or seller can cover these expenses in some instances.

Besides zero down payment, other significant perks of taking a USDA loan include:

• No buying price limit - you can purchase a home for any amount.
• Paying a lower interest than what’s available in the market.
• Cheaper monthly insurance mortgage payments.

VA Loan

A VA home loan is a sponsored mortgage by the US Department of Veterans Affairs offered to qualified veterans, active duty service members, and their spouses.

This program was initiated in 1944 to help World War II veterans start life as civilians and has continued to date.  The program allows borrowers to take mortgages without a down payment or mortgage insurance. 

On its part, the government undertakes to repay the lender in the event the borrower fails.  To qualify for a VA mortgage, you must meet at least one of the following requirements. You need to:

• Be a member of the service on active duty.
• Have actively served 181 days during peacetime or 90 consecutive days during wartime.
• Have honorably served for at least 6 years as a National Guard member or reservist, or 90 days of continuous active duty under Title 32.
• Be the surviving spouse of a member who passed away during service, or as a result of a service-related complication, became a prisoner of war, or disappeared without trace during service. In this case, you shouldn't have remarried.

You will need to provide a Certificate of Eligibility  (COE) to your mortgage lender to get a VA loan. If you do not have one yet, do not fret. You can apply online for the same or via mail.

Besides the stated military requirements, you'll also need to meet your lender's financial standards regarding credit and income. The property you intend to purchase should also be your primary residence, not a vacation house or investment property.

You'll also be required to cover the closing costs and pay a funding fee for taxpayers.  The key advantages of taking a VA loan besides zero down payment include:

• No private mortgage insurance (PMI) payment.
• No minimum credit score.
• Zero limit on how much you can borrow.

If you aren't eligible for any of these government-backed loans, a Down Payment Assistance Program might come in handy.

2. Down Payment Assistance Programs (DAP)

As the name suggests, these programs help to foot the down payment for first-time buyers. The funds can be issued by government housing finance agencies, non-governmental organizations, cities, counties, etc.

Eligibility for assistance varies from program to program, but typical requirements include:

• Being a first-time homebuyer. You can also qualify for some programs if you haven't owned a home in the past 3 years or more and don't own any investment property.
• The property should be in a specific locality.
• You must participate in a homebuyer course.

Down payment assistance comes in the following forms:

• Grants. These are financial gifts that you're not required to repay.
• Low-interest loans. These are loans that are repaid along with the primary mortgage but have low-interest rates. They are also referred to as second mortgages and help homeowners pay the down money and closing costs in bits over a period of time.
• Deferred-payment loans. You are not required to repay these loans until you relocate, sell the property, refinance the first mortgage, or pay the down money for your first loan.
• Forgivable loans. As the name suggests, these are loans forgiven after a specific period, say 5 years. You'll not be required to move or sell the house within the forgivable years; otherwise, you'll have to repay a portion of the loan or in its entirety.
• Matched savings. Some programs will require you to deposit any amount into your account then they match it. You'll then cover your down payment using the total amount funded in that account.

3. Low Down Payment Mortgage Alternatives

You can also opt for a mortgage that requires low upfront costs if you are still unqualified for the DAP. These options include:

FHA Loans

FHA loans are guaranteed by the state's Federal Housing Administration. The loan requires a minimum down payment of 3.5%. The mortgage comes with no income limit and can pay for single and multifamily units. 

You'll be required to have a minimum credit score of 580 and a DTI not exceeding 43%. Note that the loan is strictly for a primary residence.

Fannie Mae's HomeReady and Freddie Mac's Home Possible Mortgages

These are government-sponsored programs that guarantee loans with at least a 3% down payment. The HomeReady loan requires a minimum credit score of 620, whereas the Home Possible Mortgage requires 660.

Both loans are suitable if you are a low or middle-income earner, not earning more than 80% of your region's median income. You'll also pay a low PMI, which you can cancel when a 20% equity is attained.

Conventional Loans

A conventional loan is directly offered by a financial provider and can come with a small down payment. Eligibility requirements will vary by provider; therefore, ensure to do your research to find the best lender. 

This loan will also require you to pay mortgage insurance and will cost you more eventually since you'll also pay high-interest rates. The loan also comes with some attached fees.

Bottom Line

It is possible to purchase a home with no money down. Consider checking your eligibility for a USDA or VA loan if you are a service member, veteran, or spouse.

There are also assistance programs nationwide that you can check out. Finally, if all these prove difficult, ask a relative or friend to gift you a downpayment or opt for the mortgages that allow low upfront costs.