Zero and low down payment mortgage

Mortgage with no or low down payment: can you get them?

A big challenge for homebuyers is making the substantial down payment on their mortgage: you may already know that mortgage lenders typically require to put down at least 20% of the entire loan amount, otherwise, you would have to pay the burdensome PMI (private mortgage insurance) on top of your monthly installments. But saving five figures for a down payment doesn’t happen overnight, it can be hard and not within everyone’s reach. Fortunately, that’s not necessarily the case: there are several alternative solutions that can fit every prospective homeowner’s financing needs.

Here we are going to examine which options you have for homeownership, besides the traditional mortgage. You will be able to buy a house both with a low down payment and even no down payment at all: these choices will allow you to live in your desired house easier, while saving money for other crucial expenses, such as the closing costs, home remodeling or repairs, to mention a few.

What are no-down-payment mortgage options?

You can obtain financing for your home purchase through some dedicated loans and programs, provided you meet the specific requirements for each of them. Taken the importance of such a decision, the convenience of one or another option must be carefully evaluated, because each will carry some kind of downside along with the benefits.

• Credit unions. A no down-payment mortgage should be researched from credit unions: there are many of them, both local and national, that can provide such an option. They will ask customers to become members, which comes with fees; the offers and related eligibility conditions vary significantly.
• VA loans. If you are in the military service or a past veteran, the Department of Veteran Affairs can offer you and your spouse a zero down payment mortgage, and there is no PMI to be paid, as well. While the program in itself hasn’t a minimum credit score for eligibility, lenders that fund VA loans will set their own score, moreover not all veterans can qualify: there are still specific criteria to follow. You will have to pay a “funding fee”, a one-time payment that can be rolled into the monthly payments: with a zero down payment, it will cost you 2.3% of the loan amount (effective from January 1, 2020), or less if you can put down some cash. You find a VA loan from approved lenders such as banks, and online lenders. The Navy Federal Credit Union offers VA loans with a possibly reduced fee.
• USDA loans. Prospective residents of houses in designated rural areas can benefit from these kinds of mortgages. Among USDA loans, there is the “Single Family Housing Guaranteed Loan Program”, which applies to specific areas. To qualify, a minimum credit score is not required, but of course, you must demonstrate enough and a reliable source of income, along with following a few other criteria (e.g. being a first-time homebuyer). You will pay a reduced PMI, which is 0.35% of the entire mortgage amount, lower than any other mortgage. However, on top of that, there is a 1% of the loan amount yearly fee, so the total cost of such a loan is high in the long run. Understand that the USDA guarantees the loan, but the mortgage is provided by participating lenders.
• Doctor Loan Program. As the name suggests, this mortgage plan is addressed to Physicians (MD, also in their early career), residents, and fellows, to support their bills and expenses, as well as to dentists and osteopaths. The down payment can be 0%, 5%, or 10%, depending on the lender and based on a professional’s individual situation, also there is no PMI. If it’s your case, you will be able to finance a home worth up to $850,000, and in some cases 1.5 million. Your employment contract can be used as proof of income, and you will benefit from competitive rates. This program is available through many top lenders.

Making no down payment on a mortgage comes with a price: all these options have significant fees. It is recommended that you accurately account for these costs by making a budget, and see how your other upcoming expenses may find room.

What are low down-payment mortgage options?

If you can save to put down a low amount such as 3%, you will be able to save on the mortgage total cost in the long run, because less money will be subject to interest. Even in this case, there are more possible choices:

• FHA loans. This popular mortgage is offered by the Federal Housing Administration and is meant to meet mostly low to moderate-income borrowers. The down payment goes from a minimum of 3.5% up to 10% depending on credit score: you can obtain an FHA mortgage with a score requirement of at least 580, in contrast to 620 as the minimum for a conventional home loan. With a poor score, that is to say in the 500-579 range, you won’t get that 3.5%. The main drawback is that you have to pay an upfront fee, namely the mortgage insurance premium (MIP) on top of principal and interest; which is 1.75% of the loan amount, making this mortgage more costly than a traditional one. Banks and private lenders provide FHA mortgages directly, setting their own requirements. You can find a more comprehensive discussion here.
• Piggyback loan: a second loan purposely made to finance a portion of the down payment on a mortgage. Let’s say you haven’t the cash available for a 20% DP: you could borrow 80% of your home’s purchase value through the mortgage, make a 10% DP, and the remainder 10% is taken from the piggyback loan. Or you can borrow that 20% entirely, in which case you would be able to avoid PMI. The loan concerned is a viable solution if your house is high worth, and you can’t afford the upfront cost of the down payment, either partially or in full. However, piggyback loan interest rates are potentially high if your credit score is not enough good for your lender, while the most convenience goes to creditworthy borrowers.
• HomeReady program: a mortgage plan ran by the federal-sponsored enterprise Fannie Mae. Its down payment can be as little as 3%, and is suited to low or moderate-income borrowers, including rental unit and boarder income: even that 0.5% less than the FHA loan requirement could mean a tens of thousand dollars difference. Qualifying for this program requires a credit score of at least 620, but in comparison to a conventional mortgage, it boasts greater flexibility: funds can come from multiple sources, such as gifts or grants, and even cash-on-hand. The program also gives the benefit of a lower PMI than traditional mortgage insurance, resulting more affordable overall. Several lenders can offer this mortgage, with specific conditions depending on the single provider.
• Conventional 97: another plan of Fannie Mae. A fixed-rate 30 years mortgage which allows only a 3% down payment, and 620 as the minimum credit score. There are no income limits (in contrast to the HomeReady program), and you will pay a regular PMI. Similarly to the HomeReady program, you have multiple sources of income usable for the down payment: savings, gifts, grants, “Community Seconds”, free cash. The full amount of it is allowed to be covered from those sources.
• Home Possible Loan: this program was created by Freddie Mac to facilitate homeowners with incomes considered very low or low, especially first-time homebuyers, and those looking to refinance an existing mortgage, as well. It has a down payment starting from 3%, depending on one’s credit score, which must be 620 as a minimum. A unique perk is that co-borrowers not living in the home are allowed, and multiple sources of down payment are permitted. You will still pay PMI, but it’s lower than the one you find from a conventional mortgage (it can be removed once you reach 20% in your home equity). However, there are “credit fees”, up to 1.5% of the loan amount to account for as upfront costs.
• Good Neighbor Next Door. It is a program addressed to some professional categories: teachers, medical technicians in the emergency branch, firefighters, law enforcement officers. If eligible, they can put down even the paltry amount of $100, provided they can commit to living in the house for the next three years. The program is directed by the Department of Housing and Urban Development (HUD), and it can allow you to buy a designated property for 50% off its appraised value: that must be a single-family foreclosed home, purchased by the past owner through an FHA mortgage (HUD-owned). It is not a mortgage in itself: you can use any type of mortgage to pay your home, but if you want to benefit from the $100 down payment, you will have to take an FHA loan.

Is a no-down-payment mortgage worth it?

Financing 100% of your home, otherwise said, zero down payment, might be the unique choice for people who need their house fast but doesn’t have the required cash to be put down: if this is your case, you have still to meet a set of requirements depending intrinsically on which mortgage you apply to, and on the lender of choice.

Deciding to go this route, you may want to consider if it’s the best option for you first. Here is a list of no-down-payment mortgage advantages:

• You own the house faster: more often than not, there is just an urgency to satisfy this need, or it is a question of getting a certain home before it’s bought by someone else, leveraging a low current home’s market price.
• Exploiting a period of low mortgage interest rates: waiting several months for saving the necessary down payment amount would mean leaving the train to pass by.
• Saving cash to be aimed at other expenses, especially those home-related: upcoming improvements, buying furniture, or to bear the relevant closing costs of the mortgage. Some people like to save also to invest that money.

Undoubtedly, you might consider discussing with your real estate agent about the potential value of your desired house: if it’s supposed to go up (or down) in value can be the key factor, because the house may be in an appreciating area. This would constitute a strong leaning towards buying that house soon, so a zero DP mortgage will be a good deal.

On the other hand, a major risk of a zero down payment is that your mortgage might become a “loan underwater”: this happens if your house depreciates considerably after you bought it so that with your mortgage you are owing more than the home is worth. If one day you wanted to sell it, there will be a net loss. To avoid this contingency, the best thing is, again, to ask the real estate agent’s opinion.

Some financial experts disagree with the no-down-payment option for people who can’t never save because they could find themselves “cashless” in case of need in the future: if you commit to planning for a mortgage in advance, you are willing to set aside a certain amount for the down payment. This attitude isn’t pursued by everyone: if those people can’t, or don’t want to save for their mortgage, they aren’t likely to do it for other things.

So, while there are reasons and chances to make no down payment at all, you must also consider the drawbacks of such a choice. The main is that the cost of your mortgage will end up higher: even a 3% down payment will make you save considerably on interest. The more you put down, the less money will be under interest, and the faster you will be out of a mortgage. Compared to a conventional 20% DP, the interest will also be higher with a little or no down payment, because it will be applied to a greater loan amount.

Furthermore, as discussed in most cases you will pay some type of fees (or the private mortgage insurance, in case of a low DP) which constitute a small portion of the mortgage, but still lots of dollars left on the lender’s table.

The takeaway: your monthly payments will likely be higher than those of a conventional mortgage.

Is a low down payment mortgage right for you?

More and more homebuyers are choosing a low DP mortgage option. Following are the points to consider in favor of making some down payment:

• Saving on total paid interest: you will get a reduced rate on a down paid mortgage because it is considered as collateral which means less risk for the lender. Moreover, a lesser amount is actually borrowed, so the interest will be lower consequently.
• Reducing the PMI amount: As a result of the two points above mentioned, your monthly payments will be lowered.
• Gaining home equity, proportionally to the amount you put down. This means having potential cash free to use afterward. Having positive home equity is a great source of saving, to eventually exploit in case of financial constraints.

This latter point is crucial because you will pay PMI until you reach 20% of home equity: in other words, the optimum of financing a home’s purchase value is 80%, while the remainder 20% should ideally be put down. Anything below will be of course easier in the short term, but resulting in a costlier mortgage in the long run.

What about PMI?

As you may have guessed, whenever you choose a low down payment option, you will have to pay private mortgage insurance (PMI), which is generally comprised between 0.5% and 1% of the loan amount. This will be of course a relevant cost, so you want to make sure it fits into your budget, and that is the right compromise for your availability of the down payment.

It is essential that you account for this expense since it will noticeably affect your monthly payments for several years to come. There are two possibilities:

• Paying PMI upfront
  
• Rolling it into the loan balance: this way, interest will accrue on it, increasing further the cost of your loan (it goes into the monthly payments).
  

In the first case, you are committed in the short-term, and the cost adds up to the down payment itself. In the latter, you are free of the whole PMI lump-sum in the beginning but will be overly charged in the long term.

Mind the PMI can be canceled once your balance has reached 80% of the home’s purchase value (LTV ratio). In contrast, the mortgage insurance of an FHA loan is paid in most cases during the entire loan lifetime, and the same is for the funding fee of a VA loan.

So, there is definitely a no one-size-fits-all kind of mortgage: it exclusively depends on you and your financial condition, your preferences, and future plans. You will find an option more or less suitable, based on your needs and goals. We can only recommend that you know your options, then assess them carefully before making a decision of this rank.

Down payment assistance programs

If you are a first-time homebuyer or simply have not enough cash for a down payment, you can rely on dedicated programs for obtaining the necessary money. They are present in all 50 States and will vary in the offered conditions depending on your city, and even based on your county of residence because they are shaped mainly on the conditions of the local market.

They might be ideal for transitioning from renting a home to purchasing one. These programs are available through banks, private agencies, and federal-backed lenders, and come in the form of savings, grants, or loans (second mortgage) with some charged interest, or even forgivable zero-interest in eligible cases.

To qualify for these options, you must meet a few requirements as a borrower: where you live, your income, and your credit score will be the most relevant factors to consider.

You can easily find a program for which you may be eligible here( https://downpaymentresource.com/are-you-eligible/).

Where do I find mortgage lenders for a zero or low down payment?

Most mortgage servicers today will provide both low and zero down payment options. Since the choice is vast, you may get lost in options. Instead, we recommend checking our selection of well-known lenders, which include online mortgage comparison platforms: among them, you will certainly find your best deal.

Also, we strongly suggest to make the most informed decision: read our reviews, and use our mortgage calculator to budget your assumed down payment.

With all this information on hand and to your knowledge, we hope you find the best possible mortgage for your dream house.