One of the biggest barriers to buying a home is the down payment. It can be especially hard for first time home buyers to save enough money for a large down payment. Thankfully, there may be another way. With a no money down mortgage, you can still achieve your dream of home ownership with little to no money down.
What is a No Money Down Mortgage?
First things first, there isn’t just one type of no money down mortgage. There are actually several different kinds of mortgage loans that fit this description, with some designed specifically for hero groups. What kind of mortgage you qualify for will be based on your income, credit history, debt and other unique circumstances (such as being a member of the military, etc.). A no money down mortgage may not be available to everyone. To increase your chances of getting a zero down mortgage, consider taking steps to improve your credit score and pay down your debt to achieve a better debt-to-income ratio.
It’s also important to note that while zero down mortgages can make it easier to buy a home, there are some downsides. The less money you put down up front, the more you’ll have to pay off over the life of the loan. That means higher monthly mortgage payments, and because of interest, you’ll end up paying significantly more than if you had increased your down payment in the first place. You also may have to pay more private mortgage insurance (PMI) either until you get to 20% equity, or over the life of the loan. So be sure to ask questions and consider the full financial picture before deciding if a no down payment mortgage is right for you.
What Down Payment Amount Is Typical for Lenders to Request?
A lot of people assume that down payments have to be a high percentage of the house cost, and although 20 percent will usually get you a lower interest rate, that’s not a required amount. There are many loans whose requirements are much lower than 20 percent. These include FHA loans, which only require 3.5 percent and are backed by the Federal Housing Administration, allowing lenders to lend money to anyone who can’t meet the 20 percent down payment requirements of conventional loans.
Now, let’s take a look at some of the most popular no money down mortgage options out there.
Mortgage Options With a Zero Down Payment
VA Loans are available to former and current military members, as well as surviving spouses. The U.S. Department of Veterans Affairs guarantees the loan, so lenders have broader requirements for borrowers. No down payment is necessary, but you also don’t have to pay for private mortgage insurance. There is an upfront funding fee of 2.15 percent, but you may be exempt. If you are not exempt, you can add the cost to your loan and still have 100 percent financing available.
VA loans are great because in addition to low down payment requirements, the VA also puts a cap on how much you can pay in closing costs. To qualify for a VA home loan, you’ll need a good credit score, steady income and a certificate of eligibility. You can read all about VA home loan eligibility, requirements and other important information by reading our blog post here.
It’s important to remember that even though the VA determines the general requirements for VA loans, private lenders may have their own additional conditions that borrowers need to meet to receive a loan. So, if you want a VA loan but a particular lender won’t issue you one, you may need to shop around and find a different lender.
Does My Credit Score Affect My Eligibility?
The VA loan program does not have credit score requirement, but your lender most likely will. Most lenders will ask for 620 to 640, but there are some who allow a number lower than that.
Is There a Borrowing Limit?
You can apply for an unlimited amount, but the VA will only guarantee up to a specific sum. These limits are called conforming loan limits, and the Federal Housing Finance Agency decides the limits. Depending on the market you are buying in, the limitations could be anywhere between $450,000 and $720,000. You can purchase a home that exceeds the loan limits if you make a down payment for at least 25 percent of the amount that exceeds the county limit. If you go over your limit by $100,000, you can make a down payment of $25,000 and still get the loan.
The U.S. Department of Agriculture guarantees USDA loans, which are available to those who are interested in moving to specific suburban and rural regions. You may be surprised at what they consider rural. It’s not just corn fields and cow pastures. Many suburban areas fit the rural criteria, so if you’re comfortable living outside the city, USDA loans may be the perfect fit.
Are There Any Other Fees Associated with the USDA Loan?
When you apply for a USDA loan, you have to pay an upfront fee, which is one percent of the loan amount. Despite its name, you can add the upfront fee to the balance of the loan, so you don’t actually have to pay it up front. You do not have to pay a down payment, but if you have any money saved up for one, putting money down for the loan will give you a lower monthly payment.
Does My Credit Score Affect My Eligibility?
You do not need a specific credit score to be eligible, but if your score is lower than 640, you will need to complete other steps to show you are not a high-risk borrower. You cannot get a USDA loan if you are delinquent on a federal debt.
Are There USDA Loan Limits?
USDA loans also come with a number of restrictions, including borrowing limits. The amount you can borrow depends on where you’re looking to buy. In some areas, the limit can be as high as $580,000, but most areas have a limit of around $250,000. Also, the size of the home matters, with the USDA typically only issuing loans for properties under 2,000 square feet.
Your eligibility depends on your income versus the median income in your area. The USDA has a limit on your income, so if you make over the maximum, you are ineligible. Like the VA loans, there is no down payment requirement, but there is a PMI, which is usually 0.35 percent of the current loan balance per year and broken up into 12 monthly payments.
We should note that when you apply for a USDA loan, you have to pay an upfront fee, generally equal to one percent of the loan amount. Despite its name, you can add the upfront fee to the balance of the loan, so you don’t actually have to pay it up front.
Special programs, like the Doctor Loan Program, will offer no money down mortgages if you are eligible. The Doctor Loan Program is available to doctors, dentists, fellows, and residents who are just getting started and have significant student debt. Depending on your debt-to-income ratio, you will pay between zero and 10 percent, and you won’t need to pay a PMI.
The Navy Federal Credit Union also offers a Homebuyers Choice loan program to credit union members. This program doesn’t require a down payment and you won’t have to pay PMI. So, if you’re a member of the credit union, talk to a banker to see if you qualify.
If you want a lower down payment, start working on your credit score. Lenders lend money to people who have shown they can pay their money back. That means you need to start decreasing your debt and this takes time. Obtain a free credit report from www.annualcreditreport.com and start chipping away at your debt. Not only will this free up some of your money, but it will also increase your credit score so you’ll have a smaller monthly payment and therefore, more money.
Homes For Heroes
If you’re looking for a no money down mortgage, perhaps the best place to start is Homes for Heroes. While we don’t issue loans directly, when you register online, you’ll be automatically matched with a real estate or mortgage specialist in your area. Our mortgage specialists can guide you through the mortgage application process to see if you qualify for a no down payment mortgage loan. They can also offer significant savings as a thank you for all that heroes do for our communities. Our real estate specialists can also help connect you to trusted lenders who will be able to meet your needs.
Regardless of what kind of mortgage you end up getting, Homes for Heroes is proud to offer the most savings among all similar programs nationwide. In fact, heroes who use our program save an average of $2,400 when they buy or sell a house. So whether you’re most concerned with the down payment, or just want to save money wherever you can, consider partnering with Homes for Heroes on your next home purchase.
Looking for more ways to save money when buying a home? Register with Homes for Heroes and our real estate and mortgage specialists will make the process simple and easy while saving you money along the way.