Many people who want to buy their own homes are confronted with a big problem: They do not have enough money for a down payment. That is why a lot of Americans are interested in a 100% home loan. A no down payment home loan is a mortgage that finances the entire cost of the home and eliminates the down payment.
You may think after the last financial downturn that there are no 100% home financing left. It is true there are not as many as there once was. In this article, we will describe the most popular no down payment home loan programs.
Why a Down Payment?
Many renters wonder why they need to fork over thousands of dollars in most cases for a down payment anyway. As long as they have the income to pay the mortgage, why put money down? It comes down to the fact that the lender and its investors want to ensure they will be paid back. Buying a house with no money down can be stressful if you do not know where to look. Of course not all mortgage companies and banks offer home loans with no down-payment options, so you need to connect with the right sources.
Many studies have shown that the more people put down on a loan, the more likely the borrower will pay. No one wants to lose their home and forfeit tens of thousands of dollars they put into the property. Much of the research shows that the amount of the down payment is more important than credit score in determining risk.
This is why the standard down payment became 20% many years ago. Research shows that with a 20% down payment, people are very likely to keep paying on their home regardless of financial circumstances. Anything less than a 20% down payment usually requires mortgage insurance, so the lender is paid back if the borrower defaults. But there are still a few programs available where you do not have to put money down to buy a home. What are they?
This loan has been around for a long time, but it does not get a lot of coverage. It is becoming more popular today because it requires zero money down and has flexible credit standards. The USDA loan program was set up to develop rural parts of the country by encouraging people to stop renting and buy homes. To qualify, you need to have enough income to support the mortgage payment, but there are limits set by USDA for income. This program is intended for people with low to moderate incomes.
Also, you have to buy a home that is designated rural by USDA. But don’t worry: Many homes in suburbs around major US cities are still considered rural by USDA. The USDA program has 100% financing available for most borrowers. It allows the seller to pay closing costs, too, which can be up to 5% of the loan amount. So you can theoretically get into your own home with zero down and no closing costs. With this loan, it may be less expensive to buy a home than to rent. There is a 2% upfront fee that can be financed into the loan amount. Even with this additional cost, the USDA loan is an excellent no money down loan that can help you to break into home ownership with no money down.
If you are a military veteran or active military, you really cannot do better than the VA home loan. You need to have at least two years of former military service, or 90 days if you are still serving.
The VA reports as many as 23 million people are eligible for these loans but many do not know they are eligible. Anyone who qualifies should absolutely get a VA loan. It is a 100% financing loan with rates that are well below market. You also do not need to pay mortgage insurance. Also, the seller can pay your closing costs, so you can get into this home loan truly with no money down. Credit scores are flexible on this program too, with a 620-credit score still being possible for a home loan.
Another good bet is the FHA loan program. Now, FHA loans do require a 3.5% down payment, but there are ways to get around that so that it is a no down-payment loan program. FHA guidelines state you can get your down payment as a gift. Many people who are buying their first home get their down payment as a gift from a relative. So, you do not need to have your own money for the down payment if you have a source for the gift. This is not technically a 100% down payment loan, but you can get into a home with an FHA mortgage with little of your own money. FHA also offers the Good Neighbor Next Door loan, which offers police officers and teachers the chance to buy a home with only $100 down.
Takeaway on No Down-Payment Mortgage Programs
There are still quite a few 100% home loan programs out there backed by the U.S. government! Check out these nothing down mortgage options and talk to your lender about them for more information.