How to Buy a House With No Money Down
Homeownership is a dream — one that most Americans really want to make come true. Unfortunately, there are often two major roadblocks to homeownership: credit and down payments.
Some people struggle with both of these issues, while others only have trouble with one. In this guide, we’re going to talk about the down payment side and potential ways to buy a home without one.
Pros and Cons of Buying a Home With No Money Down
Before we get to options, let's talk about the ups and downs.
PROS
There are some really good reasons to buy a house without a down payment.
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The bottom line is that you can buy a home quicker if you’re not having to wait to save up for a down payment. It can take years to save enough money. If you can get a home without a down payment, you can move in much quicker.
Your Money Is Going to Your Home
Many people say that buying a home without a down payment is a bad move since you are having to borrow more money and pay out more interest. Well, yes, you are borrowing more money, but you’re not necessarily wasting it.
If you are in the process of saving money for a down payment, you are likely still having to pay to live somewhere. You are paying rent on a place you’ll never own.
If, on the other hand, you buy a home without a down payment, the money you pay out each month is still going to your home — the one you will own. Comparing these two situations, which one would you really say is wasting money?
CONS
For every up, there is a down.
Your Money Is Going to Your Home
Let’s go back to the previous point for a minute. If you buy a home with no down payment, that means you are borrowing more money. That, of course, means higher monthly mortgage payments.
Now, if you are currently living at home with mom and dad, borrowing this extra money might be, well, not the best move. However, if you’re already paying out $700 or more per month on rent, it would be more like just transferring where the money is going.
And let’s say you are currently paying $700 a month in rent in addition to saving $300 a month for your down payment. That means that paying out a $1,000 monthly mortgage is just helping you break even — and buying your home in the process.
The point is that these higher mortgage payments might be a problem, but then again they might not. You’ll have to consider your personal situation to determine if it would have a negative impact on your life.
Fewer Home Options
This may be the worst part about getting a home loan with no down payment — it limits your home options. Let’s say you can get approved for a $100,000 mortgage with no down payment. That means you’ll have to find a home whose sale price and other costs fit into that amount. If you can put $20,000 down in addition to that mortgage, though, you have more room in the budget to find your dream home.
No Down Payment Mortgages
Okay, let's get into what you came here for. If you have no money for a down payment or simply do not want to use your savings, you have a couple of options.
1. USDA Loans
If you are willing to live in a rural area, you should consider a USDA loan. These are for buyers with low and moderate-income.
USDA loans come through two avenues:
One is called the Single-Family Housing Direct Home Loan, or SFHDHL. These loans are provided directly from the USDA.
The second is a Single-Family Guaranteed Loan Program, or SFGLP. These loans are provided through lenders and guaranteed by the USDA.
As USDA loans can come from more than one place, some of the qualifications vary a little. However, to qualify, you must meet the following basic criteria:
- The home must be in a designated rural area and must be your primary residence.
- Your total household income must meet or be lower than the USDA limits for that location.
- Your debt-to-income ratio must be no more than 41 percent.
Typically, your credit score will need to be 640 or up. However, some lenders accept lower scores with other proof of responsible credit management.
2. VA Loans
If you are a veteran and can obtain a certificate of eligibility showing you’re entitled to a VA loan, this is the best way to buy a house. You must meet the following additional requirements:
You have to have the right credit score. The VA itself doesn’t have a minimum credit score required. However, most VA-approved lenders do. The score is often around 620, but this can vary.
- The home must be your primary residence.
- Your debt-to-income ratio will typically need to be 41 percent or less. Some lenders accept higher ratios with higher credit scores or cash reserves.
- You must meet the VA income requirements for your location.
VA loans typically charge a funding fee of 2.3 percent on your first VA mortgage. That percentage increases on subsequent loans.
Alternatives to No Down Payment Loans
So what if you aren’t a veteran or don’t meet the USDA loan requirements? Well, good news: you’re not hopeless. You have some other options. Here, you’ll find options for low down payments and other ways to come up with your down payment.
Low Down Payment Loans
Traditional home loans typically require up to 20 percent down, and that can be a lot. There are other options, though, that require just a fraction of that, such as:
1. FHA Loans
FHA loans are those backed by the Federal Housing Administration. They offer a great low down payment program that requires the following down payment:
3.5 percent if your credit score is 580 or up.
10 percent if your credit score is 500 – 579.
The following guidelines also apply:
The home you are buying must be your primary residence. It cannot be a vacation home or one you plan to rent out to someone else.
You’ll have to pay your mortgage insurance premium upfront and then yearly.
Your debt-to-income ratio must be 43 percent or less.
2. Fannie Mae
Fannie Mae’s HomeReady program requires only 3 percent down on your home if you meet the following:
You’ll have to have private mortgage insurance (PMI). If you were to pay 20 percent or more down, you typically don’t have to have PMI.
The home must be your primary residence.
Your credit must be at least 620.
Your debt-to-income (DTI) ratio can be no more than 45 percent in most cases. Some people with higher credit scores might get away with a DTI a little higher.
3. Freddie Mac
Freddie Mac has a similar program call Home Possible. This loan program requires as little as 3 percent down, too, but the qualification process is a little different. For Freddie Mac Home Possible loans, you’ll need the following:
Your credit score has to be 660 or up.
Your DTI can only be up to 43 percent.
The home must be your primary residence.
You’ll also need PMI.
4. Down Payment Assistance Programs
Down payment assistance programs are offered on state and local levels, so you’ll need to research exactly what’s available to you.
However, these programs are often offered to the following groups of people:
People working in specific professions. For example, teachers sometimes get assistance to move to certain locations so that they can work at specific schools.
Low-income families.
People who reside in certain low-income areas.
You can reach out to your local government officials or real estate agents for information.
Other Loans
You can always aim for personal loans to help with your down payment. These can be through a bank or even through loved ones.
This route would, of course, leave you with more than one loan to repay. However, if it’s the only way you can come up with a down payment, it is an option.
Gifts
Some people are fortunate enough that a loved one can help them with their down payment. If that’s you, good. I have yet to run across any information stating that you cannot use a gift for your down payment. And I know that low down payment loans are open to gifts. Always ask your lender to be sure, though.
If you don’t have a loved one that can gift the entire amount, go about it differently. Think about everyone who normally gives you a present for Christmas and birthdays. Contact them, tell them what you’re trying to do, and ask if they’d be willing to give you a monetary gift this year instead. Even if it’s just $20 or $50, it can help.
Saving
If you’re on this page, you’re probably thinking right now, “Well, if I could have saved the money for the down payment, I wouldn’t be reading this.” I know, but I’d be remiss if I didn’t add this to a list of alternatives for no down payment loans.
Saving a ton of money for a down payment can be overwhelming, so let’s break it down to some very basic math. Let’s say you need 3.5 percent down for your low down payment loan.
To keep it simple, you are trying to get a $100,000 loan, so you need $3,500. When you’re on a really tight budget, that sounds like a lot, I know. But with a little work and commitment, you can do it pretty quickly. Below are just some examples of how to save or make some extra money in a month:
You hold a family yard sale and make $300.
You start making your coffee at home. Depending on how much you buy out, you can save anywhere from $50 to $300 per month.
Instead of paying $30 at the drive-thru on Fridays, you cook at home, saving an extra $120.
These three small steps can put an extra $720 in your pocket in one month. You can continue this path for five months and have all you need. Or you can make extra moves to make it happen faster.
For example, you could cut your cable, brown bag your lunch for work, put your gym membership on hold, make more home-cooked meals, and try carpooling to cut down on fuel. Just about everyone can cut back somewhere. It may seem miserable to give these things up, but you can pick them back up after you’ve saved your down payment. You just might find that you don’t want to, though.
Sign Up for Goalry Mall
Need help with finding a place to cut down on your spending? We have a great resource for you. At the Goalry Mall, we have a budgeting app that you can use to get a good look at where exactly your money is going. You can also use it to set up your budget and savings goals.
Also, at the Goalry Mall, you can search for loans that can help you with your down payment, create a plan to improve your credit, and much more. It's packed with resources that can help you reach your financial goals.
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Conclusion
Buying a home with no down payment is possible as long as you meet loan requirements. Even if you don't, there are ways to buy a house with a small down payment. Work with a financial advisor, a lender, or even a real estate agent to determine the best way to buy a house for your financial situation.