a hook with keys on reflecting concept of buying a house with no money

How To Buy a House With No Money

tl;dr

What You Need To Know

  • Buying a home with a low down payment is possible, but it carries additional costs
  • Buying a house with no money down can be a smart financial move if done carefully
  • There are many programs available to help you get a low down payment mortgage if you know what to look for

Contents

You’ve got buying a home on your mind. Maybe:

  • You and your partner can’t stop talking about buying a house together
  • Everyone you know is becoming a homeowner
  • Your family is outgrowing your current home
  • You want your kids to have access to a better school district
  • You’ve earned a promotion and feel ready to say goodbye to your roommates or parents
  • You’re simply tired of paying money to a landlord every month and having nothing to show for it

Whatever the reason, you’re ready to buy a home and the real estate market seems favorable.

What’s the only thing standing in your way? You can’t afford a down payment.

Being able to put money down on a new house is always preferable. Even if it’s less than the standard 20%. But there are ways to buy a house with little to no money down. To do it successfully you need to understand:

  • Why lenders want a down payment
  • What no money down really means
  • The trade-offs and long term costs of no money down
  • The programs available to help you buy a home with no money down
  • Whether those programs are right for you

Why Lenders Want a Down Payment

A generation or two ago, the idea of putting less than 20% down on a mortgage would have been seen as a foolish risk by lenders. Then again, that was also in a time when home prices were lower, first-time home buyers carried less personal debt and you couldn’t search for a home or research mortgage lenders using your cellphone.

Today, a 20% down payment is still preferred and will likely get you the best mortgage rate and you’ll avoid mortgage insurance. But the reality is that it’s harder for home buyers like you to save a 20% down payment:

  • Home prices are rising faster than incomes
  • Low-interest rates mean lower returns on savings accounts and CDs
  • Younger home buyers have growing personal debt and income instability

That’s why many mortgage types today don’t require a full 20% down.

If you want to buy a home, but can’t afford a down payment, there are options available. But it’s also important to understand what it really means to put no money down.

No Money Down: A Definition

First, let’s be clear about something, all home purchases require an upfront financial commitment of some kind. If a lender offers you a mortgage loan and claims that it will cost you nothing, walk away. It’s probably a scam.

When we talk about “low money down,” we’re talking about mortgages that require a down payment of 5% or less. Most loans require a down payment of at least 3%, and even if a loan requires 0% down, there are usually conditions and fees that apply.

If you’re looking for an actual no-money-down loan, you may be able to find options through regular lenders. But you may also want to look at programs offered in partnership with the federal government, Fannie Mae or Freddie Mac.

Next, let’s talk about the real costs of a “no money down” mortgage loan.

The Real Cost of Buying a House With No Down Money Down

Getting preapproved for a mortgage can be free, and you may qualify for a low or even 0% down payment mortgage. But buying a home still has costs. There are immediate expenses, like earnest money and closing costs, that can cost between 1% – 5% of the home’s value upfront.

At the same time, a lower down payment could send a signal to lenders that you may not be a good risk. To protect themselves, lenders might spend more time scrutinizing your loan and digging into your financials. This may not cost money, but it will add time and stress to the mortgage process.

Buying a home with no money down usually comes with higher interest rates and mortgage insurance, which can add hundreds of dollars a month to your future mortgage payments.

When Buying a House With No Money Down Is a Good Idea

With all that said, there are some very good reasons to buy a house, even if you don’t have a down payment.

The first thing to remember is that even if you put no money down, buying a home is a big commitment. Perform a financial gut-check before you start applying for mortgages. Start by asking yourself these questions:

  • Will I earn enough every month to make my mortgage payments and meet all of my other financial responsibilities?
  • Do I expect my financial situation to improve over time?
  • Can I decrease my non-housing debts over time?
  • If I buy a home, will I be willing and able to live in it for at least 5 years?
  • If I’m looking at a specific area, is there a reasonable expectation that home prices will rise or stay the same?

If the answer to any of these questions is no, you may be putting yourself at risk of taking on too much debt or being forced to sell your home at a loss.

If you can answer yes to all of these questions, then there may be legitimate benefits to buying a house with no down payment.

Take advantage of low interest rates

While putting more down can save you money on interest rates, if interest rates are at historic lows, getting into a home sooner can save you more in mortgage interest in the long run.

Hold on to your money

If you have some savings, you may want to keep that money available for emergencies, paying off high-interest debt or simply having money on hand to furnish and fix up your new home.

Buy while prices are low

Sometimes an affordable neighborhood can change overnight. If you sense that a neighborhood is on the brink of change, you’d be foolish to wait too long to stake your claim. If you delay, the supply of available homes could diminish, and the home that you could afford to buy for $200,000 could cost $300,000 a year later.

Still ready to buy a house with no money down? There are ways to do it with a little help from Uncle Sam, Fannie, Freddie, your community and even your local lender.

A Brief Guide to No Down Payment Loan Programs

As we’ve said before, lenders hate taking risks by themselves. But they may be more willing to help you out if they’ve got someone to share the risk.

That’s why there are programs available that can help you get a mortgage at competitive interest rates for no money down. These loans fall into three main categories:

  • Government-backed loans
  • Fannie Mae- and Freddie Mac- backed loans
  • Other homeowner incentive programs

To qualify for these programs, you may need to:

  • Be a first-time home buyer
  • Meet specific income, employment and credit criteria
  • Be a qualified veteran, member of the military, or qualified surviving spouse
  • Buy qualifying homes in a certain area
  • Work in a specific profession

All of these programs are offered through mortgage lenders, like banks and online lenders, which means the final terms are offered at their discretion. But they can help you get a good deal on a mortgage with no money down.

To help you organize these loans we’ve provided a brief description of each one and a matrix that breaks down the following:

Minimum Money Down: The minimum amount of money required to qualify
Who Qualifies: Who is eligible for this loan
Minimum Credit Score: Most programs require credit scores ranging from 580 – 680
Mortgage Insurance: Is it required, and does it take the form of private mortgage insurance (PMI) or mortgage insurance premiums (MIP)?
Income Limits/Requirements: Are there any restrictions on who can qualify based on current income, employment history or financial history?

Remember, all of these programs are subject to change and can vary depending on the lender and your specific circumstances.

Government-Backed No and Low Money Down Home Loans

Federal Housing Administration (FHA) Loans

The FHA was created back in 1934 after the Great Depression to help Americans achieve the dream of homeownership. Standard FHA loans are government-backed loans offered through regular mortgage lenders that are designed to help low- to moderate-income home buyers and home buyers with past credit issues buy a home.

Minimum Money Down: 3.5% down
Who Qualifies: First-time and repeat home buyers with income and credit issues
Minimum Credit Score: 580, or as low as 500 when you put 10% down
Mortgage Insurance: MIP
Income Limits/Requirements: 2 years income required

In addition to standard FHA loans, the FHA also offers specialized loan programs:

  • Home Equity Conversion Mortgage (HECM): For older adults to draw equity from their home, similar to a reverse mortgage
  • FHA 203(k) Improvement Loan: Allows home buyers to borrow additional money for home improvements and renovations
  • FHA Energy Efficient Mortgage: Allows home buyers to borrow additional money to improve energy efficiency in their homes or install solar and wind systems
  • Section 245(a) Loan: Offers low initial monthly payments that will increase over time for home buyers who expect their income to increase

Veterans Affairs (VA) Loans

If you’re a veteran of the U.S. Armed Forces, including the Reserves and the U.S. National Guard, you qualify for a number of benefits. One benefit of your service is that you may also be eligible for a mortgage loan for 0% down through the Department of Veterans Affairs. A VA-backed loan is offered by most mortgage lenders and is designed to help eligible veterans buy a new home or refinance their current home.

Minimum Money Down: 0% down. May require a funding fee of 2.3% – 3.6% of the loan amount that can be added to the loan amount
Who Qualifies: Eligible veterans, military members, and spouses
Minimum Credit Score: Technically, there is no minimum, but most lenders prefer 580 or higher
Mortgage Insurance: Not required
Income Limits/Requirements: Lenders will want a breakdown of your finances and to review your debt-to-income (DTI) ratio. Your DTI is measured as the amount you owe each month divided by your monthly income. For VA loans, the preferred DTI is 41% or lower. But you may be able to qualify with a DTI as high as 57%.

Not sure what your DTI is? We’ve got your back. Check out our debt-to-income ratio calculator:

Debt-to-Income Calculator

Itemize Debt for Most Accurate Result
Your debt-to-income ratio…

❓   Curious what your debt-to-income (DTI) ratio is? Enter your figures and let the magic begin!

What Is DTI?

🟢   On Track – Hey money maestro! You’re right on track for your house-buying journey! Make sure you have all the information you need to make the right choice.

How much can I afford?

🟢   On Track – You’re right on track for your house-buying journey!

How much can I afford?

🚨   Above Recommended DTI – Some lenders have different requirements to qualify but it’s worth looking into your credit and finding out what you can afford within your budget.

What Is DTI?

🚨   Too Much Debt – Seems like you’ve got a little too much debt to qualify with the income you’ve put in! Do you want to try again?

Good Neighbor Next Door Loans

The Department of Housing and Urban Development (HUD) offers a special loan program that allows eligible teachers, law enforcement officers, firefighters and emergency medical technicians to buy a home for up to 50% off and for as little as $100 down. The key restriction is that the homes must be single-family homes purchased through HUD. These homes are often located in federally designated “Revitalization Areas.” Buyers are responsible for finding their own financing and for paying their closing costs and broker fees, but they may qualify for FHA or VA loans.

Minimum Money Down: $100 (but additional mortgage expenses may apply)
Who Qualifies: Teachers, law enforcement officers, firefighters and EMTs
Minimum Credit Score: 580
Mortgage Insurance: MIP may be required
Income Limits/Requirements: Must keep home as a primary residence for 3 years

Fannie- and Freddie- Backed Mortgages

People often hear about Fannie Mae and Freddie Mac (Fannie and Freddie), but they don’t always know what role these organizations play in managing their mortgage. Fannie and Freddie are commonly used nicknames for The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Both are part of the Federal Housing Finance Agency (FHFA).

Fannie and Freddie aren’t government agencies. They are shareholder-owned companies that invest in the mortgage market under strict government oversight. Their job is to help set national standards for mortgage loans, and make sure that lenders have the funds they need to keep mortgages affordable for everyone.

As the demand for low down payment mortgages has increased, Fannie and Freddie have stepped in to help lenders offer lower down payments on conventional mortgages.

Fannie Mae HomeReady

The HomeReady program helps first-time and repeat home buyers with low-to-moderate incomes buy a home or refinance it with as little as 3% down. Fixed-rate and adjustable-rate mortgages are available, and buyers can purchase between 1 – 4 unit properties.

Minimum Money Down: 3% down
Who Qualifies: First-time and repeat home buyers
Minimum Credit Score: 620
Mortgage Insurance: PMI required (but may be reduced after 90% of the loan is paid off)
Income Limits/Requirements: There are no income limits if one borrower is a first-time home buyer. If no borrowers are first-time buyers, they can’t make more than 80% of the area’s median income. Home buyer education made be required

Fannie Mae HomePath

HomePath allows home buyers to purchase houses that have been foreclosed on or repossessed by Fannie Mae. These houses are sold on an as-is basis and could require some additional work to help make it feel like home. But if you’re willing to invest some sweat (and dollar) equity, you can get a great deal for very little down.

Minimum Money Down: 3% down with up to 3% back in closing cost assistance
Who Qualifies: First-time and repeat home buyers
Minimum Credit Score: 620
Mortgage Insurance: Not required
Income Limits/Requirements: Homeownership education course required

Freddie Mac HomeOne

HomeOne is designed exclusively for first-time home buyers who are buying a home as a primary residence. These loans are fixed-rate only and available for 1-unit properties, including condominiums and units in planned unit developments. No matter where the home is located, there is a loan limit of $453,100.

Minimum Money Down: 3% down
Who Qualifies: First-time buyers
Minimum Credit Score: Technically, there is no minimum, but most lenders will want one borrower to have a credit score of 620
Mortgage Insurance: PMI required until 20% equity is reached
Income Limits/Requirements: None

Freddie Mac Home Possible

Like the HomeReady program, Home Possible allows both first-time and repeat home buyers to buy a home or refinance to lower your mortgage interest rate with as little as 3% down. The program has expanded to allow buyers to purchase 1 – 4 units, condos, planned unit developments and manufactured homes with certain restrictions. Home buyers can also buy properties with the help of co-borrowers and buy one non-occupied property that they plan to renovate for the future.

Minimum Money Down: 3% down
Who Qualifies: First-time and repeat home buyers
Minimum Credit Score: 680
Mortgage Insurance: PMI required (but may be reduced after 90% of loan is paid off)
Income Limits/Requirements: Borrowers can’t make more than 100% of the area’s median income

Other Homeowner Incentives

HFA Loans

Not to be confused with federal FHA loans, HFA loans are offered in partnership with Fannie and Freddie and your state’s Housing Finance Agency/Authority (HFA). HFAs are state programs that help residents become homeowners through educational programs and loan programs and by providing down payment assistance in the form of loans or grants. These programs can vary from state to state. What’s available will depend on where you’re looking to buy.

Minimum Money Down: 3% down with possible down payment assistance
Who Qualifies: First-time and repeat home buyers
Minimum Credit Score: 620
Mortgage Insurance: PMI required (but may be canceled after your reach 20% equity)
Income Limits/Requirements: Income limits can vary based on each state’s HFA

Physician Loan Program

New doctors, dentists and veterinarians are often saddled with expensive student loan debt after all their years of training. To help them find a home (and secure future high-income customers), many lenders offer Physician Loan programs. These programs offer conventional mortgage loans with low interest rates, low-or-no down payments and no mortgage insurance requirements. The thing to remember is that these loans are often adjustable-rate mortgages, so the interest can change over time depending on the terms of the loan.

Minimum Money Down: 0% – 10% down (based on lender)
Who Qualifies: New doctors with an M D or D O degree. Some lenders offer programs for dentists, orthodontists and veterinarians with degrees.
Minimum Credit Score: 680 – 700 preferred (varies by lender)
Mortgage Insurance: Not required
Income Limits/Requirements: None

Piggyback (80/10/10) Loans

These loans are designed to help home buyers buy a home with as little as 10% down while avoiding having to pay for mortgage insurance or higher interest rates.

Essentially, the borrower takes out two loans: An 80% loan and a “piggyback” loan for the difference between what the home buyer can put down and the balance of the purchase price.

Splitting the loans like this reduces the risk for the lender, and can also help home buyers in high-cost markets to qualify for a mortgage without exceeding the limits that would require them to get a jumbo loan.

Minimum Money Down: 10% down
Who Qualifies: Any conventional home buyer
Minimum Credit Score: 680 or higher preferred (varies by lender)
Mortgage Insurance: Not required
Income Limits/Requirements: None

Down Payment Assistance Programs

While it’s not a mortgage loan, there are programs offered by state and local government, as well as private lenders, that can provide home buyers with the funds they need to cover all or part of their down payment. These programs will have different eligibility requirements and may require a home buyer education program.

  • Grants: Free money that you can use toward your down payment
  • Forgivable Loans: 0% interest loans that you don’t have to pay back if you stay in the home for a set number of years
  • Deferred-Payment Loans: 0% interest loans that you only need to pay back when you sell, refinance or pay off the mortgage balance on your home
  • Matched Savings Programs: They are usually sponsored by a government agency or community organization. Borrowers agree to deposit a certain amount into a bank account. Based on what’s deposited, the institution agrees to match their funds as long as all the money goes toward a down payment

Final Thoughts: Buying a Home With No Money

Buying a home with no money down is possible, and it can accelerate your dreams of homeownership. Just make sure that you’ve carefully weighed the pros and cons before you commit. And take the time to learn about the mortgage loan programs that might be available to you.

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In Case You Missed It

Take-aways

  1. No home purchase is completely free. Make sure you understand all the costs of home buying, and be ready to cover upfront costs, like earnest money and closing costs
  2. If you’re a teacher, firefighter, police officer or EMT, you could buy a house for as little as $100 down
  3. If you’re a veteran or member of the military, you likely qualify for the zero down VA loan, which never requires mortgage insurance

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