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If you want a real estate mortgage with $0 down you’re not alone. Getting enough cash to make the down payment for a new home is a hurdle for millions of buyers, especially those purchasing a first house.
Research from the National Association of Realtors shows that in 2023 saving for a down payment was a major hurdle for 17% of all purchasers and 38% of first-timers.
But, happily, up-front cash hurdles can sometimes be replaced with the joy of no down payment or something close. Here’s where to find such financing.
The 20% Standard
Given a choice, lenders would like buyers to chip in 20% upfront. The reason for such a big down payment is that it means less risk for lenders, something they very much want.
A lot of households simply don’t have 20% down. If lenders only financed homes with 20% upfront there would be far fewer home sales. Not only that, there would be fewer mortgages, and that’s a problem lenders want to avoid.
Rather than require 20% down with every mortgage, lenders are happy to take less provided there’s a strong second party in the picture. What kind of strong partner? A government program, an insurance company, or a co-signer who can assure full repayment of the debt.
Such backing is available from various sources, including FHA-backed financing with 3.5% down and the HomeReady (Fannie Mae) and Home Possible (Freddie Mac) programs that require just 3% upfront.
Down payments in the 3% range solve affordability problems for many households, but borrowers can sometimes do better. There is financing out there with no money down – none.
The VA Mortgage Loan Program
Financing with nothing down has long been associated with the VA mortgage program, a form of home lending open to those with qualifying federal service. In fiscal 2023 – a period that ended September 30, 2023 – the VA reported that it had originated more than 400,000 mortgages with a total value of almost $145 billion. The typical loan amount was $361,000.
What makes the VA program special?
First, VA borrowers can purchase homes with nothing down.
Second, there’s no official VA loan limit.
Third, there’s no VA credit score requirement.
Fourth, there’s no monthly private mortgage insurance (PMI) cost.
While most loan programs have down payment requirements – and sometimes very stiff demands for upfront cash – that’s not the case with the VA program.
It might seem as though no-money-down lending would be risky and something to avoid, but the VA program proves otherwise. For instance, according to the Mortgage Bankers Association, the VA delinquency rate in the third quarter of 2023 was 3.76%. That compares with the FHA program (9.5%) and conventional loans (2.5%).
What about the lack of loan limits and credit scores? Isn’t that risky? It sounds that way, but while the VA may not have such requirements, lenders do. Lenders must ensure that borrowers have the ability to repay their loans, and as a result have credit checks and loan limits.
Lastly, the VA program looks at household size, location, and income. It then asks how much money is left over after monthly debts, obligations, and housing costs to pay for “family living expenses such as food, health care, clothing, and gasoline.” This is the “residual” income test that borrowers must pass to ensure that VA loans are affordable.
» MORE: See today’s refinance rates
USDA loans allow financing with nothing down. Developed by the Agriculture Department, they’re designed to encourage ownership in rural areas by eligible low- and moderate-income applicants.
Don’t be put off by the “rural” tag. The term is defined in such a way that the list of rural and now-suburban counties where the program can be used runs 115 pages.
That’s not all: With USDA financing you don’t need a down payment, there’s no credit check, and in some cases “when modified by payment assistance, the monthly mortgage payment can be reduced to a low as an effective 1 percent interest rate.”
While USDA financing surely has its attractions, it also has limitations. The program is broken into two parts, guaranteed loans and direct financing.
The USDA guaranteed loan program is designed to help low- and moderate-income households. It guarantees repayment when borrowers obtain financing from private-sector lenders.
The borrower’s income cannot exceed 115% of the median county average, and only 30-year fixed-rate financing is available. The money can be used to purchase or refinance single-family dwellings including “detached, attached, Planned Urban Development (PUD), condominiums, modular, and manufactured homes. The property must be used as a prime residence and not for investment purposes.
There are also no required credit scores under the program. However, lenders must be certain that borrowers have the ability to repay the loan and can establish their own credit and loan size standards.
The direct loan program is different because the money comes from the Agriculture Department and not commercial lenders. The loans are intended for low-income individuals who have been “unable to obtain a loan from other resources on terms and conditions that can reasonably be expected to be met.”
USDA direct loans have program standards not generally found with other loans. For instance, there’s a 33-year payback period and in some cases, it can be stretched to 38 years.
The properties must be “modest in size for the area” and “not be designed for income producing activities.” To get direct financing, borrowers must contact their nearest Agriculture Department Service Center.
Do-It-Yourself 0% Down Financing
There is another approach to mortgages with no money down if you don’t qualify for VA or USDA financing. Instead of using a formal program, create your own.
Closing costs can be divided into two parts: the down payment and everything else. Lenders want the down payment paid by the borrower with a few exceptions such as gifts from family and friends or money from down payment assistance programs.
You can find loan programs with down payments below 5% and – within their guidelines – make them into financing with nothing down. How?
First, see what programs with little down are available to you.
Second, see if you qualify for down payment assistance. There are thousands of these programs. Some offer grants, second loans with no required payments, interest-rate reductions, etc.
Third, are there family and friends who might help with down payment funds? Not everyone has such money and there are relationship issues to consider, but at least look around.
It might be that you can get some DPA assistance and a little help from family and friends. Combine these two potential resources and you might be able to get all the down payment money you need. In addition, if you do get down payment help, you’ll have extra dollars available for other closing costs.
Do-it-yourself down payment financing requires work, luck, and enterprise. But that may be a very acceptable price if it leads to homeownership.