The Truth About No Down-Payment Home Loans?
A no down payment mortgage allows first-time home buyers and repeat home buyers to purchase property with no monies required at closing. Other options, including the FHA Home Loan, the HomeReady™ mortgage and the Conventional 97 loan offer low down payment options with a little as 3% down. Mortgage insurance premiums typically accompany low and no down payment mortgages, but not always.
Is A No Down Payment Mortgage Right For You?
It’s a terrific time to buy a home.
Sales are rising, supply is dropping, and prices have increased in many cities and neighborhoods. Compared to next year, today’s market may look like a bargain.
Rates for 30-year loans, 15-year loans, and 5-year ARMs are cheap, which has lowered the monthly cost of owning a home.
The Down Payment Hurdle
However, it’s not the monthly payment that scares off new buyers these days — it’s the prospect of having to put 20% down.
Buyers are earning good incomes, but few have much saved in the bank.
The good news is that there are a bevy of mortgage programs requiring little or no money down and they’re available to the general public — no hoops required.
Want to buy a home with little or nothing down? You can.
Home Buyers Don’t Need to Put 20% Down
In today’s U.S. housing market, home buyers don’t need to make a 20 percent down payment. Many believe that they do, however.
It’s a common misconception that “20 Percent Down” is required to buy a home. And, while that may have true at some point in history, it hasn’t been so since the advent of the FHA loan, which occurred in 1934.
The likely reason why buyers believe a 20% down payment is required is because, with one specific mortgage type — the conventional mortgage — putting twenty percent down means private mortgage insurance (PMI) is not required.
PMI Is Not Evil
Paying PMI is neither good nor bad, but consumers seem to abhor it.
The purpose of private mortgage insurance is to protect the lender in the event of foreclosure — that’s all it’s for. However, because it costs money, private mortgage insurance gets a bad rap.
Because of private mortgage insurance, home buyers can get mortgage-approved with less than 20 percent to put down and, eventually, private mortgage insurance can get removed.
At the rate at which today’s homes are increasing in value, a buyer putting 3% down would pay PMI for fewer than four years.
That’s not long at all. Yet, many buyers — especially first-timers — will put off a purchase because they want to save a larger down-payment.
Meanwhile, home values are climbing.
For today’s home buyers, making a down payment should be consideration, but it shouldn’t be the only consideration.
This is because home affordability is not about the size of your down payment — it’s about whether you can manage the monthly payments and still have cash left over for “life”.
A large down payment will lower your borrowed amount and, therefore, will give you a smaller monthly payment to make each month. However, if you’ve depleted your life savings in order to make that large down payment, you’ve put yourself at risk.
Don’t Deplete Your Entire Savings
When the majority of your money is tied up in a home, financial experts refer to it as being “house-poor”.
When you’re house-poor, you have plenty of money “on-paper”, but little of it available for the everyday emergencies of life.
And, as every homeowner will tell you, emergencies happen.
Roofs collapse, water heaters break, you become ill and cannot work. Insurance can help you with these issues sometimes, but not always.
That’s why you being house-poor can be so dangerous.
Many people believe it’s financially-conservative to put 20% down on a home. If that 20 percent is everything you have, though, putting twenty percent down is the opposite of being financially-conservative.
The true financially-conservative option is to make a small down payment.
Being house-poor is no way to live.
No Down Payment: VA Loans (100% Financing)
The VA loan is a no-money-down program available to members of the U.S. military and surviving spouses.
Guaranteed by the U.S. Department of Veteran Affairs, VA loans are similar to FHA loans in that the agency guarantees repayment to lenders making loans which means VA mortgage guidelines.
VA loan qualification are straight-forward.
VA loan qualifications are available to active duty and honorably discharged service personnel are eligible for the VA program. In addition, home buyers who have spent at least 6 years in the Reserves or National Guard are eligible, as are spouses of service members killed in the line of duty.
Some key benefits of the VA loan are :
- You may use intermittent occupancy
- Bankruptcy and other derogatory credit do not immediately disqualify you
- No mortgage insurance is required
VA loans also allow for loan sizes of up to $636,150 in high-cost areas. This can be helpful in areas such as San Francisco, California; and Honolulu, Hawaii which are home to U.S. military bases.
No Down Payment: USDA Loans (100% Financing)
No Money Down options exist for non-military borrowers, too. The U.S. Department of Agriculture offers a 100% mortgage. The program is formally known as a Section 502 mortgage, but, more commonly, it’s called a Rural Housing Loan.
The good news about the USDA Rural Housing Loan is that it’s not just a “rural loan” — it’s available to buyers in suburban neighborhoods, too. The USDA’s goal is to reach “low-to-moderate income homebuyers”, wherever they may be.
Many borrowers using the USDA Single Family Housing Guaranteed Loan Program make a good living and reside in neighborhoods which don’t meet the traditional definition of rural.
Some key benefits of the USDA loan are :
- You may include eligible home repairs and improvements in your loan size
- There is maximum home purchase price
- Guarantee fee added to loan balance at closing; mortgage insurance collected monthly
Another key benefit is that USDA mortgage rates are often lower than rates for comparable, low- or no-down payment mortgages. Financing a home via the USDA can be the lowest cost means of homeownership.
Low Down Payment: FHA Loans (3.5% Down)
The FHA mortgage is somewhat of a misnomer because the FHA doesn’t actually make loans. Rather, the FHA is an insurer of loans.
The FHA publishes a series of standards for the loans it will insure. When a bank underwrites and funds a loan which meets these specific guidelines, the FHA agrees to insure that loan against loss.
FHA mortgage guidelines are famous for their liberal approach to credit scores and down payments. The FHA will typically insure a home loan for borrowers with low credit scores so long as there’s a reasonable explanation for the low FICO.
The FHA allows a down payment of just 3.5 percent in all U.S. markets, with the exception of a few FHA approved condos.
Other benefits of an FHA loan are :
- Your down payment may consist entirely from “gift funds”
- Your credit score requirement is 500
- Mortgage insurance premiums are paid upfront at closing, and monthly thereafter
Furthermore, the FHA supports homeowners who have experienced recent short sales, foreclosures or bankruptcies through the agency’s Back to Work program.
The FHA insures loan sizes up to $636,150 in designated “high-cost” areas nationwide. High-cost areas include Orange County, California; the Washington D.C. metro area; and, New York City’s 5 boroughs.
Low Down Payment: The HomeReady™ Mortgage (3% Down)
The HomeReady™ mortgage is special among today’s low- and no-downpayment mortgages.
Backed by Fannie Mae and available from nearly every U.S. lender, the HomeReady™ mortgage offers below market mortgage rates, reduced mortgage insurance costs, and the most innovative underwriting idea on more than a decade.
Via HomeReady™, the income of everybody living in the home can be used to get mortgage-qualified and approved.
For example, if you are a homeowner living with your parents, and your parents earn an income, you can use their income to help you qualify.
Similarly, if you have children who work and contribute to household expenses, those incomes can be used for qualification purposes, too.
Furthermore, via HomeReady™, you can use boarder income to help qualify; and, you can use income from a non-zoned rental unit, too — even if you’re paid in cash.
HomeReady™ home loans were designed to help multi-generational households get approved for mortgage financing. However, the program can be used by anyone in a qualifying area; or who meets household income requirements.
Read this complete HomeReady™ Q&A for more on the program.
Low Down Payment: Conventional Loan 97 (3% Down)
Editor’s Note: The Conventional 97 program was originally discontinued in December 2013. It was later reinstated by the Federal Home Finance Agency in late-2014. This section has been updated to reflect the new product’s guidelines.
The Conventional 97 program is available from Fannie Mae and Freddie Mac. It’s a 3 percent downpayment program and, for many home buyers, it’s a less-expensive option as compared to an FHA loan.
Furthermore, the Conventional 97 mortgage allows for its entire three percent downpayment to come from gifted funds, so long as the gifter is related by blood or marriage; or via legal guardianship or domestic partnership; or is a fiance/fiancee.
The Conventional 97 basic qualification standards are :
- Loan size may not exceed $424,100, even if the home is in a high-cost market.
- The subject property must be a single-unit dwelling. No multi-unit homes are allowed.
- The mortgage must be a fixed rate mortgage. No ARMs via the Conventional 97.
The Conventional 97 program does not enforce a specific minimum credit score beyond those for a typical conventional home loan. The program can be used to refinance a home loan, too.
Editor’s Note : The Conventional 97 program was originally discontinued in December 2013. It was later reinstated by the Federal Home Finance Agency in late-2014. This section has been updated to reflect the new product’s guidelines.
Low Down Payment: The “Piggyback Loan” (10% Down)
The “piggyback loan” program is typically reserved for buyers with above-average credit scores. It’s actually two loans, meant to give home buyers added flexibility and lower overall payments.
The beauty of the 80/10/10 is its structure.
With an 80/10/10 loan, buyers bring a ten percent down payment to closing. This leaves ninety percent of the home sale price for the mortgage. But, instead of giving one mortgage for the 90%, the buyer splits the loan into parts.
The first part of the 80/10/10 is the “80”.
The “80” represents the first mortgage and is a loan for 80% of the home’s purchase price. This loan is typically a conventional loan via Fannie Mae or Freddie Mac; and it’s offered at current market mortgage rates.
The first “10” represents the second mortgage and is a loan for 10% of the home’s purchase price. This loan is typically a home equity loan (HELOAN) or home equity line of credit (HELOC).
Home equity loans are fixed-rate loans. Home equity line of credits are adjustable-rate loans. Buyers can choose from either option. HELOCs are more common because of the flexibility they offer over the long-term.
And that leaves the last “10”, which represents the buyer’s down payment amount — ten percent of the purchase price. This amount is paid as cash at closing.
80/10/10 loans are sometimes called piggyback mortgages because a second loan “piggybacks” on the first one to increase the total amount borrowed.
80/10/10 loans are meant to give buyers access to the best pricing available, so lenders may sometimes recommend an alternate structure. For example, for buyers of condos, a 75/15/10 is advised because condo mortgages get better rates with LTVs of 75% or less.
As another example, interest rates on HELOCs are sometimes better at larger loan sizes. Your lender may recommend that you increase the size of your HELOC, then, to lower your overall loan costs. The choice of your loan’s structure, though, remains yours.
You can’t be forced into borrowing more money on your second mortgage than makes you comfortable.
Mortgage Down Payment FAQ
How can I buy a house with no money down?
In order to buy a house with no money down, you’ll just need to apply for no-money-down mortgage. If you don’t which mortgage loan is your best zero money down option, that’s okay. A mortgage lender can help steer you in the right direction. There are multiple 100 percent mortgages available for today’s home buyers.
Can cash gifts be used as a down payment?
Yes, cash gifts can be used for a down payment on a home. However, when you’re receiving a cash gift, you’ll want to make sure you follow a few procedures.
For example, make sure the gift is made using a personal check, a cashier’s check, or a wire; and keep paper records of the gift, including photocopies of the checks and of your deposit to the bank. Also, make sure that your deposit matches the amount of the gift exactly.
Your lender will also want to verify that the gift is actually a gift and not a loan-in-disguise. Cash gifts do not require repayment.
What are the FHA down payment assistance programs?
FHA down payment assistance programs are available to home buyers and 87% of U.S. single-family homes potentially qualify. Programs will vary by state, so be sure to ask your mortgage lender for which programs you may be eligible. The average home buyer using down payment assistance receives $11,565.
Are there any home buyer grants?
Home buyer grants are available to U.S. home buyers and all are eligible to apply, which are also known as down payment assistance (DPA) programs. DPA programs are widely-available but seldom used — 87% of single-family homes potentially qualify, but less than 10% of buyers think to apply. Your mortgage lender can help you determine which DPAs are best for you.
What are the FHA loan requirements?
The FHA loan requirements are; 1.) You must have a credit score of at least 500; 2.) Income which can be verified using W-2 statements and paystubs, or federal tax returns; 3.) No history of bankruptcy, foreclosure, or short sale within the last 12 months. 4.) You must not be delinquent on your federal taxes, your federal student loans, or any other federal debt.
What are the benefits to putting more money down?
Just as there are benefits to low and 0 money down mortgages, there are benefits to putting more money down on a purchase. For example, when you put more money down on a home, the amount you need to mortgage is less, which reduces your monthly mortgage payment. Additionally, if your mortgage requires mortgage insurance, with more money down, your mortgage insurance will “cancel” in fewer years.
If I make a low down payment, do I pay mortgage insurance?
When you make a low down payment, you’re more likely to pay mortgage insurance (MI), but not necessarily. For example, the VA Home Loan Guaranty program doesn’t require mortgage insurance, so if you use a VA loan, making a low downpayment won’t matter. Conversely, FHA and USDA loans always require mortgage insurance so even with large down payments, you’ll have a monthly MI charge.
The only loan for which your down payment affects your mortgage insurance is the conventional mortgage. The smaller your down payment, the higher your monthly PMI. However, once your home has twenty percent equity, you’ll eligible to have your PMI removed.
If I make a low down payment, what are my lender fees?
The size of your down payment doesn’t relate to your lender fees. No matter how large or how small your down payment, your lender fees should remain equal. This is because mortgage lenders are prohibited from charging higher fees based on the size of your down payment . It should be noted, however, that different loan types may require different services (e.g.; home inspection, roof inspection, home appraisal), and this may affect your total loan closing costs.
What is the minimum down payment for a mortgage?
The minimum down payment for a mortgage are:
- VA loan: 0% down payment
- USDA loan: 0% down payment
- Conventional 97 mortgage: 3% down payment
- HomeReady™ mortgage: 3% down payment
- FHA loan: 3.5% down payment
In addition to the above programs, down payment assistance programs are often available and provide, on average, more than $11,000 to today’s buyers of homes.
How can I fund a down payment?
A down payment can be funded multiple ways, and your lender will often be flexible. Some of the more common ways to fund a down payment is to use your savings or checking account; or, for repeat buyers, the proceeds from the sale of your existing home.
However, there are other ways to fund a down payment, too. For example, home buyers can receive a cash gift for their down payment or can borrow from their 401k or IRA (although that’s not always wise).
Down payment assistance programs can fund a down payment, too. Typically, down payment assistance programs grants money to home buyers with the stipulation that they live in the home for a certain number of years — often 5 years or fewer.
Regardless of from where you fund your down payment, though, make sure to keep a paper trail. Without a clear account of the source of your down payment, a mortgage lender may not allow its use.
How much home can I afford?
The answer to the question of “How much home can I afford?” is a personal one, and one which should not be left to your mortgage lender.
The best way to answer the question of how much can you afford for a home is to start with your monthly budget and determine what you can comfortably pay for a home each month. Then, using your desired payment as the starting point, use a mortgage calculator to work backwards in order to find your maximum home purchase price.
Note that today’s mortgage rates will affect your mortgage calculations so be sure to use current mortgage rates when you’re doing your calculations. When mortgage rates change, so does home affordability.
Zero Down Mortgage Loans
Zero down mortgages are 100% financed loan types offered by the U.S. Department of Agriculture (USDA loan or “Rural Housing Loans”) and the Department of Veteran Affairs (VA loan). Additionally there are several low down payment options like the FHA loan (3.5% down), the conventional 97% (3% down) and the HomeReady mortgage (3% down).