The costs of buying a home add up quickly, from the actual price of the property to the moving expenses and closing costs. And, on top of taking on a new monthly mortgage payment, you may also need to make a down payment. The size of your down payment depends on a few different factors, including your mortgage program, income, and debt load.
But it’s also possible to get a no-down-payment mortgage to reduce your upfront costs. We’ll cover a few different options and what requirements you’ll need to meet in order to qualify.
- How to get a no-down-payment mortgage
- No-down-payment vs. low-down-payment loan
- Pros and cons
- How to apply
- FAQ
How to get a no-down-payment mortgage
No-down-payment mortgages are offered through two different government loan programs: one through the Department of Veterans Affairs (VA) and the other through the U.S. Department of Agriculture (USDA). Both programs have very specific qualification requirements. Note that even though these no-down-payment programs are insured by the federal government, you still apply and receive financing through private mortgage lenders. Each one has its own criteria and terms, so it’s still important to compare offers to make sure you pick the best option available.
VA home loan qualifications
A VA home loan offers a zero-down-payment option for eligible active-duty service members, veterans, and surviving spouses. You must request a certificate of eligibility to verify that you meet the service requirements. Veterans need to submit a copy of their discharge or separation papers, while active-duty service members need a signed statement from their commander, personnel officer, or administrative assistant to the senior officer confirming their duty details.
The VA doesn’t require a minimum credit score; instead, lenders set their own credit requirements. The VA does have a maximum debt-to-income ratio (DTI), 41%.
USDA qualifications
USDA home loans help buyers afford housing in rural areas. There are several requirements for both the borrower and the property itself. On the borrower side, your income must be under 115% of the area’s median income. The USDA offers a lookup tool to check your county’s income limits based on your family size.
Additionally, the home must be your primary residence. It also has to be located in an eligible rural area. Look up home addresses on the USDA Property Eligibility site to find options that qualify for this loan.
No-down-payment vs. low-down-payment loan
How does a no-down-payment loan stack up against a low-down-payment mortgage such as the FHA program? Let’s assume you buy a $300,000 house with an 8.00% interest rate and a 30-year loan term. The home is in a rural county and qualifies for a USDA loan. If you served in the U.S. military, you could also buy the house with a VA loan, but the FHA would be on the table, too.
Let’s see what that would mean from a dollar-and-cents point of view for each home loan.
| FHA | USDA | VA | |
|---|---|---|---|
| Down payment | 3.5% | 0% | 0% |
| Down payment amount | $10,500 | $0 | $0 |
| Loan principal | $289,500 | $300,000 | $300,000 |
| Monthly mortgage payment | $2,124 | $2,201 | $2,201 |
| Origination fee | 1% of loan principal | 1% of loan principal | 1% of loan principal |
| Origination fee total (to be paid at closing or rolled into the loan) | $2,895 | $3,000 | $3,000 |
| Upfront mortgage insurance premium (MIP) fee/guarantee fee/funding fee | 1.75% of loan amount | 1% | 2.15% |
| Upfront MIP amount | $5,066.25 | $3,000 | $6,450 |
| MIP percentage | 0.55% of loan amount | 0.35% of loan amount | 0% |
| MIP amount | $1,592.25 yearly; $132.69 monthly | $1,050 yearly; $87.50 monthly | $0 |
| Monthly mortgage payment with MIP | $2,256.69 | $2,288.50 | $2,201 |
*Not included in the above calculation are property taxes, which vary depending on the house and its location.
As you can see, there isn’t much of a difference when it comes to the monthly cost between an FHA loan and a USDA loan. While the loan amount is smaller with an FHA loan because of the down payment, the MIP is higher (0.55% annually compared to the 0.35% of a USDA loan).
If you qualify for a VA loan, you will have a higher upfront funding fee when compared to an FHA or USDA loan, but because of the lack of mortgage insurance for the life of the loan, you will save a significant amount of money. Plus, it is possible to lower the funding fee to 1.25% of the loan amount if you make a down payment of 10% or more. Compared to the USDA loan in our example, the VA loan would have a monthly savings of $87.50, a yearly savings of $1,050, and a lifetime savings of $31,500.
Pros and cons of a no-down-payment mortgage
Weigh the advantages and disadvantages before applying for a no-down-payment mortgage:
Pros:
- You don’t have to save up for a large down payment.
- Ability to become a homeowner sooner.
- Money can be used for house repairs and renovations.
Cons:
- For USDA loans, homebuyers will have to pay mortgage insurance.
- There might be additional fees.
- No immediate equity in the home.
How to apply for a no-down-payment mortgage
Ready to apply for a no-down-payment mortgage? Here’s what to expect throughout the process:
- Review your eligibility: Both VA and USDA loans have very specific guidelines. Check your qualifications before applying.
- Check your credit score: Neither program has a set minimum credit score, but lenders will have specific guidelines. For a VA loan, lenders generally like to see a minimum credit score of 620 to 640, and for a USDA loan, they typically prefer a minimum score of 640. Find out your credit score and take a look at your different lender options to see which ones make the most sense for you.
- Calculate your debt-to-income ratio (DTI): Your DTI must be under 41% for both mortgage programs. That means your total debt payments each month (including your mortgage) can only be 41% of your gross (or pre-tax) income.
- Compare mortgage lenders: Before you choose a no-down-payment mortgage lender, you’ll want to compare their guidelines and restrictions, customer service reviews, closing timelines, and determine if they offer any other types of financial assistance.
- Complete the paperwork: Once you choose a lender, you will need to complete the mortgage application and provide any necessary documentation so that they can verify your identity, job history, income details, and other financial details.
- Pay closing costs: Even with no down payment, you’ll have some upfront costs to pay with a VA or USDA loan. Your lender will give you an estimate of how much this will be based on the home you’re buying.
FAQ
What is down payment assistance?
Some state and local governments offer down payment assistance for certain homebuyers, usually first-time homebuyers and/or lower-income buyers. Programs vary by jurisdiction, but you could qualify for down payment grant money that doesn’t need to be repaid or subsidized loans. Check with local lenders who specialize in down payment assistance programs to make sure you access any discounts that you’re eligible for.
How much of a down payment should I save?
It depends on the home loan program you choose. If you get a VA or USDA loan, you might qualify for a zero-down-payment mortgage. Otherwise, expect to pay at least 3% of the purchase price with a conventional loan or 3.5% with an FHA loan. Lenders also estimate the maximum monthly payment you qualify for based on your credit and finances. A higher down payment could help you afford a more expensive home.