Is saving for a sizable down payment stopping you from buying a house? You might qualify for a mortgage with no down payment requirements.
If you think the upfront costs of buying a home are overwhelming, you’re not alone. Approximately 40% of prospective homebuyers believe that coming up with the cash for a down payment and closing costs is nearly impossible, according to recent data from Bankrate, CNET’s sister site.
There’s a common belief that buying a home requires a 20% down payment -- a steep expense considering the high cost of buying a home in 2023. But this 20% rule is just a myth, often confused with mortgage insurance requirements. While you might need to pay a monthly or annual premium for mortgage insurance if you don’t put 20% or more down on a home, you can buy a house with a significantly smaller down payment. And in some cases, you can put down no money at all.
Homebuying programs that don’t require a down payment
If you’re looking to buy a home somewhere outside of a metropolitan area, you might qualify for a USDA loan. Backed by the United States Department of Agriculture, these loans require you to purchase a home in a designated rural area and offer up to 100% financing. You can find out if the home you’re looking at qualifies for a USDA loan by entering the address in the USDA’s eligibility map.
There are two different types of USDA loans: Single Family Housing Direct, which is for low-income buyers and comes with 33-year or 38-year repayment terms, and Single Family Housing Guaranteed, which is for moderate-income buyers and comes with a typical 30-year repayment plan. While there is no specific credit score requirement, you must meet the lender’s requirements for Single Family Housing Guaranteed loans.
One of the big benefits available to current or former military personnel is a VA home loan. These mortgages don’t require a down payment, have lower-than-average interest rates and no private insurance requirement. But they do charge a VA funding fee. The fee varies, but in most cases, it will be 2.15% of the loan amount for first-time buyers. However, you can roll the fee into the loan amount to avoid paying cash upfront.
The VA doesn’t have a minimum credit score requirement, but the lender you find a VA loan through might. Typically lenders have lower requirements for VA loans and may approve you if your credit score is closer to 500.
To ensure your service status puts you in the running for one, contact the VA to request your Certificate of Eligibility.
State and local down payment assistance programs
Most down payment assistance programs are reserved for those with lower incomes and may come with purchase limits. You can explore other down payment assistance programs through your state’s housing authority. Depending on where you buy a home, you might qualify for a locally sponsored down payment assistance program.
Some of these programs are grants, which means you don’t have to pay the money back. Some are forgivable loans, which won’t require you to repay the funds if you live in the home for a specified time. For example, SC Housing -- the state of South Carolina’s housing authority -- offers two types of forgivable down payment assistance programs. For buyers with incomes of 80% or below the area median income, your assistance is forgiven in 10 years, while buyers with incomes above the 80% mark must stay in the home for 20 years to avoid repayment.
Other down payment assistance programs may come in the form of deferred loans. This typically means you won’t pay the money back until you pay off your mortgage, refinance your loan or sell the home. In some cases, down payment loans charge no interest, while other programs tack on an interest rate.
Sorting through a maze of different down payment assistance options can be confusing. It’s smart to find a real estate agent who has experience in helping buyers understand the fine print of different down payment assistance programs.
Other ways to lower the upfront costs of buying a home
Even if you don’t qualify for down payment assistance, there are additional ways to minimize your upfront costs as a homebuyer. Here are three options to consider:
- Ask the seller to cover some of your closing costs: The down payment isn’t the only line item to worry about when purchasing a home. Closing costs can add thousands of dollars to your bill. Sometimes a seller will agree to pay for some of your closing costs to help push the sale through. This is called “offering concessions.” This lowers the amount of money you’ll need to pay at the final closing, but there are restrictions on how much a seller can actually pay. For example, sellers can pay up to 4% of the loan amount for VA loans, excluding prepaid discount points.
- Ask a friend or family member for help: If you’re lucky enough to have a friend or family member with a sizable bank account, you can use a donation from them to cover all or some of your down payment and closing costs. These must be gifted funds, though, with no expectation that you will need to repay them. You may need to show your lender a gift letter that verifies the friend or family member is giving you the money with no strings attached.
- Find a no-closing-cost mortgage: Don’t let the name deceive you -- you’re still going to have to pay closing costs. You’ll just roll those expenses into the total loan amount instead of paying upfront. While helpful in the short term, this option is ultimately more expensive since you’ll pay interest on the additional amount. Not all lenders allow this, either, so be sure to ask about availability when comparing different home loan programs.
Pros and cons of buying a home with no money down
The ability to spend no money upfront when buying a home may sound appealing, but it isn’t all upside. Here are a few important pros and cons to consider:
You can own a home sooner. Rather than trying to figure out additional ways to cut your expenses and grow your savings -- which can take a long time -- buying a home with no money down means you don’t have to wait until your bank account crosses a certain threshold to become a homeowner.
You don’t have to drain your savings. If you put down nearly all of the cash you have saved, you might be in a tough situation if you later find you need cash for an emergency. By keeping more of your money in a savings account, you’ll have enough reserved for unexpected expenses like medical bills, car troubles and potential home repairs.
The seller might not take your offer as seriously. If a seller is considering multiple offers for their home, a down payment of $0 isn’t as promising as an offer with a sizable chunk of money from the buyer. So, you might lose out to another buyer who doesn’t need to secure 100% financing.
You’ll pay more money long-term. If you don’t put any money down now, you could end up paying tens of thousands more in interest during the lifetime of your home loan.
You’ll have a higher monthly mortgage payment. Since you’re rolling more money into the loan and financing the entire cost of the home, expect to pay more for your mortgage each month. Depending on the type of home loan you use, you may also have to pay mortgage insurance costs.
The bottom line
Homebuyers have been putting a record amount of money toward their down payments. Last year, the average down payment for lower-tiered homes was more than $30,000, according to data from CoreLogic. But it is possible to buy a home without putting down tens of thousands of dollars. Just be aware of the risks when deciding if a no-money-down mortgage is right for you.