One of the first things to think about before buying a house is how much money to put down. Some mortgages require a 20% down payment, while others might require a lower percentage of the purchase price at closing. However, there are also ways to buy a house with no money down.
What is a no-down-payment mortgage?
Each lender has different qualifications for a no-money-down home loan.
A no-down-payment mortgage is a loan that doesn't require a percentage of the purchase price to be paid as a part of closing. This means the lender will finance 100% of the cost of the house. Conventional mortgages require a down payment of at least 3%, and some require 20%.
However, for some homebuyers, a down payment isn’t an option. There are certain types of mortgages that require no down payment at all. The most common mortgages with no down payment are VA loans, backed by the U.S. Department of Veterans Affairs, and mortgages backed by the U.S. Department of Agriculture, called USDA loans.
How does a no-down-payment mortgage work?
The process for a no-down-payment mortgage is similar to those for other loans. You must meet certain qualifications set by the lender for the type of loan requested. The lender will collect information and documents to go to an underwriter for approval. The only difference is you will not have to pay a down payment at closing like you would with other types of mortgages — although there will still be other traditional closing costs.
Who can benefit from a no-down-payment mortgage?
Mortgages that don’t require money down are helpful if you do not have access to the money for a down payment. Maybe you are a first-time homebuyer, don’t have savings or have savings but want to keep those funds for another purpose.
Pros and cons of buying a house with no money down
Even if you don’t have any savings, you can qualify for a no-money-down mortgage.
There are pros and cons to buying a house with no money down. To determine if this is an option for you, you should consider your income, savings, how long you plan to live in the house and whether you can qualify for a mortgage with no down payment. Sometimes, it might be better to make a small down payment if you can manage it. For example, an FHA loan requires 3.5% of the purchase price as a down payment.
What are the pros of buying a house with no money down?
The potential benefits of buying a house with no down payment:
- You can move into a home by paying closing costs only. This allows you to keep the money you have in savings — or you can get a home even with no savings.
- You could potentially buy a home earlier in life because there's no need for a large amount of savings.
- Savings not used for a down payment can be used to make upgrades or repairs to the new house.
What are the cons of buying a house with no money down?
There are also drawbacks to buying a house with no down payment:
- Because the lender will finance 100% of the purchase price, the monthly payment is higher.
- You may need to pay for mortgage insurance that protects the lender if you default on the loan.
- Because you are financing 100% of the purchase price, you might need to buy a less expensive home than if you reduced the purchase price with a down payment.
- If the market declines, there's the potential you'll owe more on the house than it's worth.
- Some no-down-payment mortgages have extra fees.
How to qualify for a mortgage with no money down
VA and USDA home loans are the most common no-money-down mortgages.
The most common types of mortgages with no down payment are VA loans and USDA loans. Each program has different standards for credit scores, loan limits and required documents.
VA loans are mortgages backed by the U.S. Department of Veterans Affairs. Mortgages in the VA program do not require a down payment. The loans are available for current and former service members who meet certain criteria, including:
- Serving 90 consecutive days in wartime, or
- Serving 181 consecutive days in peacetime, or
- Serving at least six years in the National Guard or Reserves, or
- Being the spouse of a service member killed in the line of duty or due to duty-related injuries, or the spouse of a service member who is missing in action or a prisoner of war
Each VA lender will also have its own qualifications for a home loan approval.
- Credit: Lenders will look at credit history, and while there's no credit score requirement set by the VA, lenders will have their own criteria. Most lenders require a minimum credit score of 640, though some will approve a VA loan with a lower score.
- Income: VA loans do not have an income requirement, but the lender will look at monthly income left over after you pay all expenses.
- Appraisal: There is a special VA loan appraisal process that homes must go through before a lender will approve the mortgage.
- Loan limits: As of 2020, there are no maximum loan limits on VA loans as long as you have full entitlement.
VA loans are offered by various VA loan lenders, including banks, mortgage companies and credit unions.
The purpose of USDA loans is to promote homeownership in eligible rural areas. The house must be used as a primary residence. Each lender will also have other requirements for loan approval.
- Credit: Although the USDA loan program does not have a required minimum credit score, most lenders want to see a credit score of 640 or higher. Lenders will also consider the length of credit history, credit in use and credit repayment history.
- Income: USDA mortgages for single-family homes have income limits that vary according to county. According to the USDA, applicants must have a household income that doesn’t exceed 115% of the median household income. You can find out if your income is in the qualifying range on the USDA website. In addition to income limits, USDA lenders also require at least one year of income history and a debt-to-income ratio no higher than 41% (factoring in the new mortgage payment).
- Loan limits: The USDA does not set a maximum purchase price. The amount applicants can borrow is based on the ability to repay.
There are many lenders that offer USDA loans. These companies are also available to answer questions about eligibility and different loan scenarios.
What do you need to have in order before you apply for a no-down-payment mortgage?
When you apply for a no-down-payment mortgage, you will need to provide a number of supporting documents. These items include:
- Photo identification
- Proof of income, W-2s and 1099 forms
- State and federal tax returns
- Social Security and retirement income documentation
- Bank and asset statements
- Child support or divorce settlement amounts
Some lenders will also ask for a letter from an employer verifying salary, length of employment and proof of consistent rental payments if you’re living in a rental property. There will also be loan-specific document requirements depending on the type of mortgage you apply for.
For example, a VA loan requires a Certificate of Eligibility (COE) showing military service qualifications. A USDA loan lender will need to see documentation about the house to make sure it meets the location requirements.
How to calculate how much house you can afford with a no-down-payment mortgage
With a no-payment-down mortgage, it's important to calculate how much you can afford for a monthly payment. Many factors can impact your monthly payment, including the interest rate, the loan term, the down payment and the type of mortgage. If you don’t put any money down, the monthly payment will be higher than if you do put money down.
There are resources that help you calculate a house price that is realistic based on the criteria you provide. ConsumerAffairs offers a calculator that will estimate the home price you can afford using your income, interest rate, mortgage term, down payment and the state you live in.
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