A guide on how to buy a house with no money down

Buying a home can seem like a wonderful idea since a home is a place of your own where you can put down roots, raise a family and entertain friends. The decision to buy a home is one of the biggest decisions you’ll ever make, due in part to the financial responsibilities that come with such a large purchase. Along with having the money to afford your monthly mortgage payment, you probably will also need to make a down payment – often several thousand dollars. That’s not always the case, though. Sometimes, it’s possible to buy a house without a down payment, or at least paying a lower one.

Let’s take an in-depth look at how to buy a house with no money down. We’ll also explore various low down payment options as well as other ways of reducing your down payment and closing costs.

Can you buy a house with no money down?

The short answer is yes, you can buy a house with no money down. People do this in a number ways, from successfully negotiating during the home buying process to put no money down, to using a government-backed loan with a zero-down requirement, to taking advantage of a down payment assistance program that helps the buyer with their down payment. In sum: You may have more options at your disposal than you think.

It’s important to first understand, however, that a down payment is a portion of the purchase price that the buyer pays upfront. Although most mortgage options require that a minimum percentage of the home value be set aside for a down payment, you’ll find a couple of well-known zero down payment options.

Whether either of these options will work for you will depend on factors such as whether you’ve served in the military or are looking for a home in a rural area. Also available are low down payment options and other ways of funding your initial investment, which we’ll cover below.

How to buy a house with no money down

Zero-down home loans immediately come to mind when someone is trying to buy a home without facing a significant upfront cost. However, you’ll also find options such as down payment assistance, gift funds or negotiating with the lender and/or seller to cover some or all of the closing costs.

Next, we’ll delve a bit deeper into some steps you can take to potentially save money when purchasing a home.

Look for mortgage loans with no money down

When looking for zero-down mortgage options, you’re likely to find that those backed by the government are the most straightforward options available. Some lenders with access to private funding may offer to finance your home without requiring a down payment, but most shy away from 100% financing options due to the risky nature of the investment.

If you do happen to find a private lender that doesn’t require a down payment, chances are that your interest rate will be higher and you’ll also need excellent credit history. That said, some no down payment options are more attractive to the borrower than other zero-down home loans – but you first must qualify.

Consider down payment assistance

If you’re a first-time home buyer and don’t qualify for a zero down payment option, you might consider seeing what down payment assistance options may be available to you. Down payment assistance (DPA) comes in the form of grants, loans and other programs reserved for first-time home buyers. Keep in mind that, in real estate, being a first-time home buyer simply means you haven’t owned property in the past 3 years.

Let’s quickly break down some of the DPAs that may be available to you:

●      Grants: Grants are essentially just gifted money and are considered the most valuable form of down payment assistance.

●      Forgivable loans: Forgivable loans are a second loan that you won’t have to pay back as long as you stay in your home for an agreed-upon number of years. With an interest rate of 0% and usually enough funds to cover a whole down payment, this is a DPA worth investigating if you’re planning on staying somewhere long-term.

●      Deferred-payment loans: This second loan also comes with 0% interest and is usually large enough to cover your down payment. You won’t have to repay a deferred-payment loan until you move, sell, refinance or pay off your first loan – which usually happens with money made from selling your home.

●      Matched savings programs: Matched savings programs are run by banks, government agencies or community organizations and are another way that homeowners can receive help making a down payment. As the name suggests, any funds you put into an account with the program will be matched to help cover a down payment.

Check with your lender to see what forms of down payment assistance they accept.

Use gift money

Down payment gift money is exactly what it sounds like: A sum of money that’s been gifted to you from a friend, family member or donor with the intent of going toward the down payment on your home. During the underwriting process, your mortgage lender will look at any gifted money you may have so they can get a better sense of your assets and gauge your riskiness as a borrower.

You can receive gifted money through:

●      Cash down payment gifts: Cash down payment gifts are simply when you receive cash from the gift giver to use toward your down payment. It’s important with cash gifts that the donor documents the transfer of funds by preparing a gift letter to serve as tangible proof that a transaction has taken place, while also verifying that gifted funds aren’t peer-to-peer loans intended to be paid back at a later date.

●      Gifts of equity: Gifts of equity are when you’re sold a property below the sale price – usually by a family member – and these gifts, too, will require a gift letter. The difference between the listed price of the property and the price you paid is considered an amount of equity you can use toward your down payment and closing costs.

Keep this in mind: Requirements on where gifts can come from will differ from lender to lender and may depend on the type of loan you’re looking to qualify for. For example, some lenders allow gifts that come from family members only, and some allow gifts from close friends.

Ask your lender to cover closing costs

One option you have is to ask your lender to cover some or all of your closing costs. This can be structured in a couple of ways depending on the type of loan you’re getting and which costs are being covered.

You may be able to add certain costs to the loan balance rather than paying them at closing. This is often the case with upfront mortgage insurance premiums and loan funding fees.

The other scenario involves taking a lender credit toward closing costs. Here, a lender covers all or a portion of your closing costs in exchange for you taking a slightly higher interest rate.

No matter how the deal is structured, you’ll pay more in interest over time, but you could avoid a large upfront down payment at closing and save on closing costs.

Ask the seller to pay closing costs

You may also be able to negotiate the purchase price of a home or get the seller to cover closing costs, reducing the amount you have to bring to the closing table. This may only be possible, though, in a buyer’s market where the number of sellers far exceeds the number of home buyers, which can make sellers more flexible during negotiations and give you more control. 

Pros and cons of buying a house with no money down

If you're looking to buy a home with no money down, you should be aware of both the advantages and the drawbacks.

No down payment mortgage options

Let’s go for a deeper dive into some of the common financing options available for purchasing without a down payment.

VA loans

A VA loan is a loan guaranteed by the U.S. Department of Veterans Affairs (VA). VA loans don’t require a down payment from qualified home buyers, though most buyers will have to pay a one-time VA funding fee that replaces standard mortgage insurance and covers the cost of funding the VA loan program.

If you don’t make a down payment, the VA funding fee is 2.15% of your loan’s value, and rises to 3.3% with each subsequent use of a zero-down VA loan. If you make a down payment, your VA funding fee may be lower. Additionally, certain individuals are exempt from the VA funding fee. They are:

●      Veterans receiving VA disability benefits

●      Qualifying surviving spouses who receive Dependency and Indemnity Compensation

●      Purple Heart recipients currently on active duty

If you do have to pay the funding fee, this and other closing costs can often be built into the loan. Although choosing this option will likely mean a higher loan amount, you’ll be able to save money on the front end.

If you’re an active-duty service member, veteran, member of the Army Reserve or National Guard, or the spouse of a deceased veteran, you may qualify for a VA loan. If applying for the loan with our friends at Rocket Mortgage^Ⓡ, you’ll need a minimum median credit score of 580. Per VA guidelines for VA loan eligibility, you’ll also need to meet one of these:

●      Completed 90 consecutive days of active service during wartime

●      Completed 181 consecutive days of active service during peacetime

●      Served over 6 years in the National Guard or Army Reserve, or served at least 90 days under Title 32 orders, with 30 of those days being consecutive

If discharged before meeting service time requirements, the discharge must be due to a service-connected disability.

If you’re the spouse of a deceased veteran who passed away while serving or as a result of a service-related disability, you may qualify as a surviving spouse.

It’s not uncommon for VA loan borrowers to need proof of reserve funds or additional money that they won’t be using for upfront costs. Reserve funds basically show that you’ll still have enough money to begin making your payments after closing on your loan. Although it can vary based on your situation, 2 months’ worth of mortgage payments is typically a good starting point.

You should also consider the kind of property you have in mind for your future home, as that can affect your borrowing options. While a VA loan can be used on condos, the complex must be on a VA-approved list.

USDA loans

A USDA loan is a loan backed by the U.S. Department of Agriculture (USDA) and is meant to encourage growth and development in designated rural areas. USDA loans can provide low- to moderate-income home buyers with the opportunity to buy a home with a no down payment mortgage, and although these require an upfront and annual “guarantee fee,” (with the latter divided into monthly payments), this fee is typically lower than fees associated with other mortgage options.

If you’re wondering whether a USDA mortgage is right for you, let’s first figure out if you’re eligible. Here’s a list of requirements you’ll need to satisfy for a no-money-down USDA loan:

●      Your total debt-to-income ratio may not exceed 41%.

●      Your monthly payment debt-to-income ratio (DTI) may not exceed 29%.

●      The total gross income of your household can’t exceed 115% of the median income in the county where you’re looking to buy.

●      Many lenders require a credit score of at least 640.

●      You must buy a home that will serve as your primary residence in a USDA-approved rural area.

“Rural areas” doesn’t exclusively mean fields and dirt roads – in fact, many suburban areas may qualify – but if your dream home is in the heart of a bustling metropolitan area, a USDA loan may not be right for you. Examine the USDA’s map of eligible areas to see if your desired location is USDA-approved.

It can also be important to note that while a USDA loan is government-backed, you generally won’t actually get your loan through the USDA. The exception to this is the direct loan the USDA offers for low- or very-low-income borrowers. Otherwise, you’ll still need to find a good lender to work with and receive your loan that way.

Rocket Mortgage doesn’t currently offer USDA loans.

State programs

Each state housing authority has its own lending options, including some that include down payment assistance. A good starting point for finding your state’s housing authority is a local buying directory maintained by the Department of Housing and Urban Development (HUD).

It's important to note that participation in many of these programs requires working with an approved lender.

Buying a house with little money down

Low down payment loan options offer more ways to buy a home while paying less money upfront. Conventional and FHA loans have minimum down payment requirements that can be manageable for low-income home buyers. Conventional loans may require as little as 3% down, and FHA loans may require as little as 3.5%.

Government-sponsored enterprises Fannie Mae and Freddie Mac also offer low down payment programs for qualifying buyers, including some who aren’t first-time home buyers.

For your convenience, we’ve included an at-a-glance chart of these options.

Take a closer look at your low down payment mortgage and program options below.

Conventional loans

If you’re a first-time home buyer, you can get a conventional loan with as little as 3% down. Here are some of the other conventional loan requirements:

• For a single-unit primary property, a minimum down payment of 3% – 5% is required depending on first-time home buyer status. Certain conventional loan options may also consider income.
• You’ll need a minimum qualifying credit score of 620 or better. Your qualifying FICO® Score is generally the middle one among your Equifax®, Experian™ and TransUnion® scores. Like your down payment, your credit score is one of the biggest factors impacting your interest rate.
• Lenders also look at your DTI to determine the monthly mortgage payment you can afford. This could also affect your interest rate on a conventional loan. To give yourself the most mortgage flexibility, we recommend keeping your DTI under 40%.

FHA loans

FHA loans are another option for first-time home buyers who don’t have a sizable down payment. You can get an FHA loan on a primary property with as little as 3.5% down. But the big selling point of an FHA loan is that your credit score can be as low as 580 if your house payment and overall DTI are low enough. In fact, some lenders offer FHA loans to borrowers with a credit score as low as 500, but you’ll have to make a 10% down payment in that instance.

If you’re considering this type of loan, be aware that FHA appraisal requirements around safety and move-in readiness are a little more stringent than appraisal requirements with most other loan types. Here’s a quick breakdown of FHA loan requirements:

• A 3.5% down payment (with a credit score of 580 or higher)
• Only available for primary residences
• A 580 minimum credit score but more flexibility on DTI with a score of 620 or higher
• A mortgage payment that can’t account for more than 38% of your gross income and more than 45% of your total DTI with a 580 qualifying credit score (if your qualifying credit score is 620 or better, there’s more flexibility in DTI, but the exact ratio to qualify is handled on a case-by-case basis)

HomeReady^® loans

Another 3% down option from conventional mortgage investor Fannie Mae is a HomeReady^® loan. Unlike the first option we talked about, you don’t need to be a first-time home buyer. Here are the requirements:

• A 3% minimum down payment for a one-unit property
• Not making more than 80% of the median income in your area
• The potential to qualify with a credit score as low as 620, although pricing may be better with a score of 680 or higher
• A recommended DTI of under 40%

Home Possible^® loans

Home Possible^® is the Freddie Mac equivalent of HomeReady^®, as the two have the same requirements. Home Possible^® is a 3% down program for both first-time and repeat buyers. Whether your lender uses Fannie Mae or Freddie Mac will depend on a number of factors, but it’s important to note that Home Possible^® and HomeReady^® are the same from a qualification perspective.

Both HomeReady^® and Home Possible^® loans come with a loan level price adjustment (LLPA) credit of 1% of the loan amount up to $3,500. If the loan is below $200,000, the credit will be $2,000 as opposed to 1%. If you make 50% or less of the median income in your area, you qualify for a $2,500 credit under these loan options. 

When to consider a zero-down mortgage

Zero-down mortgages make the most sense if you have limited savings that you may need to hold onto or put toward other expenses, such as closing costs, moving costs or furniture. Or, you might use your down payment savings money to do work on your new home.

By qualifying for a zero-down mortgage, you might also be able to pay a bit more for a house.

Buying a house with no-money-down FAQs

Now that you understand the landscape of zero-down and low down payment mortgages, let’s tackle a few common questions around this topic.

Is it a good idea to put no money down on a house?

It depends on your situation. Not having to save for a down payment frees up money for other home-related expenditures, but a larger down payment can mean a lower interest rate that will save you money later on.

Can I get approved with no money down?

Yes, if you qualify for a VA or USDA loan. USDA loans and VA loans each have an upfront fee to consider, though.

What is the lowest possible down payment for a house?

For a single-unit primary residence, the minimum down payment on a conventional loan is 3%. Minimum down payment requirements vary based on the type of loan you choose.

What credit score do I need for a zero-down home loan?

It depends on the lender and whether you’re seeking a zero-down VA loan or zero-down USDA loan. In most cases, you’ll need a credit score of 640 or higher to be USDA loan eligible. Individual lenders set the credit score requirement for VA loans, as the Department of Veterans Affairs doesn’t have a minimum score to which loan applicants must adhere.

The bottom line

It’s possible to buy a home without a down payment. You may be able to qualify for a zero-down-payment loan through the USDA, the VA or a state housing finance agency that doesn’t have a down payment requirement. This could allow you to put more money toward other closing costs, moving expenses, furniture and other items associated with buying a home.Keep in mind, though, that buying without a down payment may lead to a higher interest rate since your down payment plays a central role in the loan terms your lender is willing to grant you.

For a look at loan options that involve little or no down payment, you can start the mortgage approval process today and take the first step toward finding your new home. You can also feel free to give the Home Loan Experts at Rocket Mortgage a call at (833) 326-6020.