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No-Down-Payment Home Loans: Do They Exist, And How Do They Work?

5-Minute ReadApril 29, 2021

Buying a house can be a huge life event for many – and it can also be an expensive one.

These days, a lot of prospective home buyers experience difficulty saving up for a typical 20% down payment. Fortunately, they don’t have to. Some qualified first-time home buyers could even end up putting nothing down if they happen to qualify for a no-down-payment home loan.

In this article, we’ll explain no-down-payment home loans and how they work, as well as list some important qualifiers so you can check your own eligibility. Make sure to read our list of home loan options, too, and see which mortgage could work for your present situation.

What Are No-Down-Payment Home Loans (Or “Zero-Down Mortgages”)?

No-down-payment home loans, also called “zero-down mortgages,” are just as they sound. They require no down payment at closing – as opposed to the typical 20% – and are fully financed by the lender. Even with no down payment, though, closing costs will still apply.

How Can A Mortgage Have No Down Payment?

A down payment assures the lender – one step beyond a credit check – that the borrower is reliable and won’t default on their loan payments. A no-down-payment home loan is only available if a borrower takes out a government-backed loan. Government loans are insured by the federal government and guarantee that lenders are paid back in full if a borrower defaults, so that those who need financial assistance to buy a home are able to get it.

First-Time Home Buyer Loans With Zero Down

Currently, there are only two types of home loans that don’t require a down payment: VA loans and USDA loans. For each of these, there are varying sets of qualifications you’ll need to meet before you can apply – but if you’re eligible for either, you could be one step closer to homeownership.

VA Loans

VA loans, backed by the Department of Veterans Affairs, are no-down-payment home loans available to eligible service members or veterans. A VA mortgage is originated by private lenders and insured by the VA, and requires no down payment or mortgage insurance fee. The only upfront payment on the mortgage is a one-time 2.3% – 3.6% funding fee depending on whether it's your first time using a VA loan or a subsequent use. This fee is often rolled into your loan balance.

To qualify for a VA loan, you must meet one of the following service requirements:

  • You are an active-duty or veteran service member who has served at least 90 consecutive days during wartime.
  • You are an active-duty or veteran service member who has served at least 181 consecutive days during peacetime.
  • You have served more than 6 years in the National Guard or Reserves. You can also meet the service requirement by serving 90 days under Title 32, with at least 30 of those days being consecutive.
  • You are the spouse of a service member killed or disabled in the line of duty and have not remarried and received dependency and indemnity compensation.

While the VA doesn’t require potential borrowers to have a specific credit score, many lenders do impose a minimum credit score. For example, Rocket Mortgage ® requires a credit score of at least 580.

USDA Loans

USDA loans are backed by the Department of Agriculture and are meant to assist prospective homeowners in specified rural or suburban residences to help increase development in those areas.

For a home to be eligible for a USDA loan, it must meet certain criteria:

  • The home must be located within an eligible rural or suburban area.
  • The property must act as your primary residence.
  • Only single-family units may apply.
  • The home cannot be a working farm.

Additionally, you as the borrower must meet the following financial requirements:

  • Your combined household income cannot exceed 115% of the median income of your area or county.
  • Your debt-to-income ratio (DTI) must be lower than 45%.
  • You should have a credit score of at least 640.

While you can finance 100% of your home’s purchase price, there is an upfront and annual fee called a “guarantee fee.” The current guarantee fee is 1% of the home’s purchase price followed by an annual payment of 0.35%. As with a VA loan, this upfront fee can be rolled into your loan balance.

Get the right home loan for you.

Alternative Options: Home Loans With Low Down Payments

If you’re not a former or current service member, or you don’t want to live in an eligible USDA area, you’re not out of luck yet. While the following loans can’t promise zero down, their down payments can be lower than many of your other loan options.

Conventional Loans

Conventional loans are not backed by the government, but by Freddie Mac and Fannie Mae. Depending on your loan and your lender, you could make a down payment of as little as 3%. Is there a catch? Sort of. Because your down payment is lower than 20%, your lender will require you to purchase private mortgage insurance (PMI). This insures your lender if you end up defaulting on the loan, but won’t really benefit you or your home personally, even though the payments are coming out of your pocket. Fortunately for you, you’ll be able to cancel your PMI as soon as your home’s equity reaches 20%.

To qualify for a conventional loan, borrowers must have a DTI below 36% and a minimum credit score of 620.

FHA Loans

FHA loans are backed by the Federal Housing Administration and are meant to assist people with lower or moderate incomes. With an FHA loan, you can pay as little as 3.5% down if you meet the following requirements:

  • You have a minimum credit score of 580 (much lower than with a conventional loan).
  • Your DTI is under 50%.
  • The home you’re buying meets FHA property standards and will be your primary residence.
  • You will move into your new home within 60 days of closing.

You can still qualify for an FHA loan with a minimum credit score of 500, but you will have a higher down payment. For a score in the 500 – 579 range, you can pay 10% down.

Similarly to conventional loans, you’ll be required to pay for mortgage insurance if your down payment is under 10%. You’ll have to pay an upfront and annual mortgage insurance premium (MIP) – the amount of which will depend on federal insurance rates, your loan amount and term – for the life of the loan. However, borrowers can get rid of their MIP if they refinance to a conventional loan and then build 20% equity.

Conventional and FHA loans aren’t your only option, though. There are a number of grants and programs for first-time home buyers that can provide buying and down payment assistance. 

Pros And Cons Of No-Money-Down Home Loans

There’s a lot to be gained from paying no money down on a house, but nothing is perfect. Let’s review the benefits and drawbacks of a no-down-payment loan before you commit to anything.

Pros

  • You won’t have to save up for a down payment.
  • You’ll have more cash to put toward other expenses after you buy.
  • A higher mortgage balance means more deductible mortgage interest when filing your taxes.

Cons

  • You’ll have a higher monthly payment.
  • Your lender will likely charge you a higher interest rate.
  • Your mortgage fees may be higher, and loans with lower down payments will require you to pay for mortgage insurance.

The Bottom Line

As you can see, there are plenty of options out there if you’re unable to commit to a full 20% down payment. VA and USDA loans require no money down if you qualify, and conventional or FHA loans allow for down payments as low as 3% or 3.5% respectively. Many of these options come with other fees, but spending less or nothing on a down payment can leave you with more cash in your savings account to handle those fees as well as other expenses.

Still not convinced? Feel free to read more home buying tips in our Rocket Homes® Home Buyer’s Guide.

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