If you are considering buying your first home, chances are you have been wondering how much money you will need as a down payment and how you will be able to save that money. For many first-time home buyers, this down payment often creates an obstacle to home ownership. But what if there was a first-time home buying program that offered no down payment mortgages? For many qualified buyers, there is no need to spend years saving for a substantial down payment, allowing you to buy a house with no money down. For those that may not qualify, low down payment loans are also available, making home ownership much easier.
What is Zero Down Payment Mortgage?
When you purchase a home with a conventional loan, a down payment is typically required. For example, if you purchase a home for $250,000, a typical down payment of 20%, or $50,000, is needed. For many first-time home buyers, this down payment is out of reach. In this case, a zero-down payment mortgage is an alternative.
As the name implies, a zero-down payment mortgage is a home loan that allows you to qualify with no down payment. These loans are guaranteed by the government and are designed to help home buyers overcome the down payment hurdle that keeps them from becoming a homeowner.
No down payment house loans
There are currently two different government-backed home mortgage loans available that do not require a down payment: VA loans and USDA loans. Each one of these options has specific qualifications home buyers must meet in order to qualify.
1. VA Loans
VA loans are offered to a specific group of qualified buyers. VA loans are available for specific active-duty service members, National Guard members, and qualified surviving military spouses. Specific service requirements can include:
- Must have served 90 consecutive days during wartime or 181 days during peacetime
- Served in the National
- Guard or Reserves for more than 6 years
- Been discharged by a service-connected disability
- Be a military spouse of a service member that died in the line of duty
In addition to meeting one of the required service requirements, VA loan qualification includes a credit score of at least 580. While these loans do not have a down payment requirement, they do require a one-time VA funding fee that is 2.3% of your loan value. This payment is in lieu of mortgage insurance and can be added to your mortgage amount and paid overtime. This fee increases to 3.6% for every subsequent VA loan you have.
2. USDA Loans
Backed by the United States Department of Agriculture, a USDA loan is designed to encourage development and home ownership in rural and suburban areas of the United States. While USDA loans offer a no-down-payment option and lower fees than other traditional loans, they do require many more specific qualifications, including:
- Home must be in a specific rural or suburban area as determined by their eligible areas.
- Must be a single-family home and not a working farm.
- Combined gross income cannot be more than 115% of the median income in the county.
- Debt-to-income ratio cannot be higher than 45%
- Credit score of at least 640
Other options: Low-down payment home loans
Unfortunately, because of the strict requirements for these no-down-payment loans, many homebuyers do not qualify. However, other loan options offer low-down payments, making it easier for first-time homebuyers to qualify.
1. Fannie Mae and Freddie Mac Mortgages
Fannie Mae and Freddie Mac are federally backed home mortgage companies that were created by the United States Congress in 1938 to provide affordable mortgages to low- and moderate-income borrowers. They offer multiple low down payment loan options for first-time buyers.
Conventional Loan 97
The Conventional Loan 97 program is available from both Fannie Mae and Freddie Mac. This loan option requires a 3% down payment and, unlike with other loans, this down payment can come entirely from gifted funds. Basic qualifications for a Conventional 97 loan include:
- Home loan maximum is $647,200.
- Property must be a single-unit home
- Loan must be a fixed-rate mortgage
The HomeReady mortgage is offered by Fannie Mae and provides below-market mortgage rates, innovated underwriting, and reduced private mortgage insurance (PMI) to lower-income borrowers. HomeReady mortgages do have certain requirements borrowers must meet to qualify and these include:
- Income limit that cannot exceed 80% of the area’s median income
- Credit score greater than 620
- Attend a 4-6 hour homeownership education course
- Debt-to-income ratio under 50%
- Home must be a primary residence
Similar to Fannie Mae’s HomeReady Mortgage, Freddie Mac offers the Home Possible mortgage. This mortgage offers a 3% down payment option and is also aimed at borrowers with lower incomes. Similar to HomeReady, the 3% down payment can come completely from gifted funds. Requirements for a Home Possible loan include:
- 660 or higher credit score
A debt-to-income ratio below 43%
- Stable and verifiable income
- Income no higher than 80% of the area’s median income
- Home must be a primary residence
2. FHA Loans
Designed for borrowers with low to moderate income, an FHA loan is backed by the Federal Housing Administration. FHA loans typically require down payments of at least 10%, however, those with a credit score of at least 580 can qualify for a 3.5% down payment option. Eligibility requirements and borrower guidelines for an FHA loan include:
- Credit score over 580 allows for a lower down payment, but borrowers must have a credit score of at least 500.
- Mortgage insurance premium (MPI) is required for the life of the loan
- Debt-to-income ratio must be less than 43%
- Home must be the primary residence
- Must have verifiable steady income and proof of employment
3. Conventional loans with 3% down payment and PMI
When most borrowers think about conventional loans, they think about the traditional 20% down payment. However, some lenders offer conventional loans with down payments as low as 3% for first-time home buyers, but with one major requirement. Private mortgage insurance (PMI) must be paid for the life of the loan.
Zero Down Home Loans Can Help You Achieve Home Ownership
Homeownership does not need to be out of reach because of a down payment obstacle. No down payment loan options or loans with minimal down payments allow first-time and lower incomes borrowers the chance to qualify for a mortgage and purchase the home of their dreams. At Hero Home Programs, we understand how overwhelming the home buying process can be and we are here to help you navigate every step of the process, including helping you find the mortgage option that best fits your needs. Request for a consultation today to learn how we can help you get the keys to your new home.