Most people still think they need 20% down to buy a home.
Nothing could be further from the truth.
In fact, the average first-time homebuyer only puts about 6% down according to the National Association of Realtors. And there are numerous programs that allow you to put down even less than that and mortgages that require no down payment at all.
Ready to become a homeowner in 2021? Here’s your chance.
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Top no down payment mortgages
Despite what you may have heard, zero-down and low-down payment mortgage programs are plentiful in today’s market.
Communities benefit when you buy a home. That’s why the government, as well as non-government organizations, create options for first-time and repeat buyers who have little money upfront.
Here’s a list of top programs that require no down payment or just a small one that can get you into a home sooner than you thought possible.
1. USDA home loans
One of the goals of the United States Department of Agriculture (USDA) is to encourage economic development in rural areas. As such, it offers the zero-down USDA home loan.
These no down payment mortgages are the best-kept secret in homebuying.
Sure, it might sound like a loan reserved for farms or large plots of land, but it’s actually only for regular homes that happen to be in rural and suburban areas.
Suburban? Yes: many built-up areas around major metros are eligible. That’s because the definition of “rural” is quite loose. Your favorite neighborhood might qualify. To check, just go to USDA’s property eligibility map and type in an address.
There are income limits, though. You have to make less than 115% of your area’s median income to qualify. As an example, a buyer in Denver, Colo., can make up to $114,850. So the program is not ultra-restrictive.
If you qualify, you can get into a home with nothing down — just pay for closing costs and you’re in. And even those can be covered with gift funds.
2. FHA loan with down payment assistance
You may have heard that FHA loans require 3.5% down, which is true. So why is it near the top of this list?
Because that entire down payment can be covered by a financial gift from family, an employer, or down payment assistance provider.
In fact, about 40% of all FHA homebuyers use some kind of down payment assistance.
Here’s how it works:
- Apply for an FHA loan, letting the lender know you’ll be using gift funds
- Get a gift letter from the donor stating the gift does not have to be repaid
- Document the funds coming out of the donor’s account and placed into yours
- Use those funds at closing to cover the 3.5% down payment
- Apply any remaining funds toward closing costs
With a large enough gift, you could walk into a home with zero dollars of your own funds. And FHA rules allow it. Why not take advantage?
Even if you don’t have family members who have the capacity to give, you can look around for down payment assistance programs in your area. Nearly every city, county, and state in the U.S. has some sort of program. Many can cover your down payment, closing costs, or both. (More on this below).
Plus, FHA is lenient on income and credit levels. You might be surprised that you can qualify now, even if you expected to have to wait years before you could be approved.
3. VA home loans
Those with current or former military service should check out the VA loan before any other program. Why?
- No monthly mortgage insurance
- Ultra-low interest rates
- Lenient credit guidelines
- No down payment required
VA home loans are better than any other program on the market today because they are a subsidized benefit earned from service. Applicants must serve between 90 days and six years depending on type of service.
For those who qualify, it’s likely the best path to homeownership with little or no money out of pocket.
4. Fannie Mae HomeReady
The HomeReady program is like FHA in that the entire down payment can come from gift funds.
The program only requires 3% down, but that can come from a family member or eligible down payment assistance program.
Qualifying may be easier than with other loans, too. It allows you to count income from a household member as a compensating factor, even if they are not on the loan.
If you’ve had a roommate for the past 12 months, things get even more interesting. If the roommate helped pay rent for at least 9 of the last 12 months, and they plan to live with you in the new home, you can count the rent they were paying as future income.
As an example, your roommate has paid $300 toward the rent for each of the last 12 months. This is documentable by canceled checks or bank transfers. You can add $300 per month to your existing income to help you qualify as long as it doesn’t exceed 30% of your qualifying income.
The extra income may get you approved for more house, or it might turn your denied loan into an approved one.
But not everyone will qualify. Your income must be at or below 80% of your area’s median. So if median income is $80,000 per year, you must make $64,000 or less.
It’s worth talking to a HomeReady lender to see if you can add roommate or household member income to qualify.
5. Freddie Mac Home Possible
Freddie Mac Home Possible is another 3% down program. Again, the entire down payment can come from a gift, meaning you could become a homeowner with little or no money out of pocket.
Like Fannie Mae HomeReady, your income must be at or below 80% of your area’s median income. See Freddie Mac’s eligibility tool to verify the maximum income in your area.
Also, like HomeReady, you can use roommate income to qualify under certain conditions (see the HomeReady section above).
Where Home Possible stands out is a rule that says you can use sweat equity toward your down payment. What does that mean exactly?
It means you can put DIY work into a home in lieu of making a down payment.
First, the home must be appraised. If there are any deficiencies, those are noted in the appraisal report.
From that point, materials you purchase or labor you perform count toward your down payment.
How is the value of the labor calculated? The appraiser will estimate the value of labor, or the lender may use another cost estimating service. If the value of labor plus materials adds up to 3% of the home price, that covers your entire down payment. Plus, you move into a nicer home.
In some cases, you’ve made the home “lendable” if financing was not available prior to the repairs.
Keep in mind that this process is easier said than done. You do not own the home at this point, so the seller could refuse to sell after you put in the work. Additionally, the seller may not allow you to do work on the property for fear of damage or liability.
But if you find a willing seller, sweat equity could be your path to homeownership.
6. Freddie Mac HomeOne
Freddie Mac HomeOne is a 3% down loan geared specifically toward first-time buyers. In fact, it’s a requirement that you have not owned a home in the last three years.
This program is more lenient in some ways than HomeReady and Home Possible because there are no income limits. So even if your income is way above your area’s median, you can still qualify.
And gift funds are an acceptable source for the entire down payment.
So if you’re a high-income earner and don’t qualify for other programs due to income limits, but don’t want to put much down, HomeOne might be for you.
7. FreddieMac BorrowSmartSM
The Freddie Mac BorrowSmartSM program isn’t a loan type itself, but an assistance program that you can combine with Freddie Mac Home Possible® or HomeOne® programs.
For borrowers who meet income limit requirements, it offers up to $1,500 in down payment assistance that can be applied towards a 3% down payment requirement.
Assistance amounts are available as follows:
- $1,000: Income is between 80.01% and 100% of area median income (AMI) and property is in a high-needs tract. Can be combined with HomeOne only
- $1,000: Income is between 50.01% and 80% of AMI. The home does not need to be in a high-needs tract. Can be combined with Home Possible only
- $1,500: At or below 50% of AMI. Combinable with Home Possible only
An extra $1,000 or more could be a big help if you’re struggling to come up with funds for a down payment.
8. Conventional 97 / Conventional 95
Fannie Mae offers the “Conventional 97” program, meaning you can pay as little as 3% down. The conventional 95 is similar, but requires 5% down.
Neither of these programs come with income limits — any income level may qualify. Nor do borrowers have to be first-time buyers.
The only caveat is that any first-time buyers must complete homebuyer education for the 3% down option.
So if you’ve owned a home before, or have high income, these may be great options to buy a home with a conventional loan while putting very little down.
9. Piggyback 80-10-10 mortgage
You may have heard of a Piggyback or 80-10-10 mortgage, and these are identical programs. The best feature of this loan is that it allows you to avoid mortgage insurance.
Lenders consider the secondary financing as part of the 20% down needed to avoid PMI. You still owe this amount, but it counts toward your down payment, at least as far as the primary mortgage is concerned.
You structure the loan as follows
- 80% primary mortgage
- 10% secondary mortgage
- 10% down
The second loan is usually secured through a different lender, although some lenders offer both loans.
It can be a bit of a juggling act to close on both loans on the same day. You must coordinate with the second mortgage lender and inform them of the exact closing date. And, rates are likely higher on the smaller second mortgage.
Still, this structure is a great tool if you want to put less than 20% down while avoiding mortgage insurance.
10. Conventional 10% down loan
Conventional lenders allow you to put 10% down on their standard programs. Unlike the Piggyback loan, you finance the home purchase with a single loan equal to 90% of the purchase price.
This option requires private mortgage insurance (PMI), but the PMI cost is much lower than if you were to put 3-5% down. Your mortgage rate could be lower, too. Plus, PMI is cancelable once you reach around 20% equity in the home.
There are no income limits and you don’t have to be a first-time buyer. A 10% down loan is a popular option indeed.
11. State bond loans
To encourage homeownership and the economic development that comes with it, states offer subsidized loans to low-to-moderate income families.
Private lenders approve and issue the loans, but states back them via bond sales.
As a homebuyer, you may qualify for lower-than-market interest rates, making homeownership more affordable. This is especially helpful in expensive locales.
The best way to find out programs that are available in your area is to talk to a licensed and reputable lender in your state. Upon contact with a lender, ask for a loan officer who is versed in state bond loans.
12. Physician loan program
Physicians face unique challenges when buying a home, such as high student debt and no money saved for a down payment upon starting their career.
That’s why physician loans are their own category with some lenders.
Select lenders offer 100% financing to buy a home, meaning no down payment is required. Plus student loans can be removed from debt-to-income ratios if they are deferred for more than 12 months.
These are even available to doctors who just started a job after graduating or are within 60 days of starting.
Find out more about physician loans here.
Why low and no down payment mortgages can be a good idea
Your parents probably advised you to save up 20% to buy a home.
But that’s because, when they bought their home, it probably cost $80,000 and the interest rate was 12%.
Now that a starter home is north of $500,000 in many cities, it’s no longer feasible to save up 20%. Nor is it cost-effective, considering how low rates are.
You could try to save $100,000, but it might take decades.
All the while, home prices are rising faster and faster. You can’t save fast enough to keep up. What you thought would be 20% down is now just 15%.
And rent just keeps going up, following skyrocketing home prices.
Enter no- and low-down-payment loans.
These 100% financing home loans allow you to shortcut the saving process, fire your landlord, and buy a home now. Sure, you have to have decent credit and prove yourself financially responsible in other areas.
But with a zero-down loan, you start to benefit from home appreciation rather than being penalized by it.
Cash is king in emergencies
You may have heard the term “cash is king.” That’s certainly true when you own a home.
You might have a ton of equity in your home, but that won’t help you if you can’t make your payment. Banks won’t lend on that equity if you’ve lost your job.
If you put 20% down, you’ve likely depleted your emergency fund. There’s no war chest to tap into during a job loss or medical emergency. Your home is at risk if you can’t make the payment.
Many who put 20% down could be counted as foolish. That is unless they have massive cash reserves on top of the 20%. But putting down more than you have to is extremely risky for most first-time buyers.
Would you rather keep your home, or have the satisfaction of putting 20% down just to lose the home and the 20% down payment?
Still, many misguided or ill-informed “experts” say it’s less risky to make a large down payment. But the question is, less risky for whom?
It’s certainly less risky for the bank to lend on a home for which the buyer put 20% down. With a large down payment, the bank can foreclose on the home, sell it again, and make its money back.
But with a low- or no-money-down loan, you transfer much of that risk to the bank. If you can’t make your payment, the bank experiences most of the loss, not you.
The same principle applies if the housing market tanks. Your home’s value drops, but it’s the bank that absorbs that loss. Your hard-earned 20% down payment doesn’t vanish.
In today’s market, it doesn’t make a lot of sense to put 20% down on a house. Anyone who tries to tell you otherwise has probably not done their homework.
Pros and cons of no down payment mortgages
As described above, no down payment mortgages come with huge advantages.
The pros of no down payment mortgages
- Less risky for you in many ways
- Start building equity faster
- Turn home price increases from an enemy to a friend
- Save cash for emergencies
- Stop paying your landlord’s mortgage sooner
But these loans also come with some disadvantages
The cons of no down payment mortgages
Private mortgage insurance (PMI)
Most low or no down payment mortgages come with mortgage insurance. If you default on the loan, the lender makes a claim on the insurance policy for any losses incurred. It’s basically a safety net for the lender in place of the 20% down payment. While PMI is not “bad” (as discussed below), it is a bit of a nuisance to pay. So many include this in the “con” column. Still, it enables you to build massive equity sooner, so it has its advantages as well.
Less equity in the home
Having little or no equity in the home does carry risk. If you need to sell the home shortly after you purchased, you may have to pay a lot of money to do it. That’s because it costs between 8-10% of the home’s price to sell, depending on agent commissions, local excise tax, and closing costs.
So it could cost $30,000 to sell a $300,000 home.
If you have zero equity, you have to pay $30,000 out of pocket or simply walk away from the home, which ruins your credit. That’s why it’s important to understand the commitment of purchasing a home, regardless of the down payment. If you think you’ll have to relocate in the next 3-5 years, it’s best to continue renting.
You’ll have a larger mortgage balance and payment if you put less down. If you want to buy the biggest house possible, it’s worth considering making a down payment of 10-20%. That brings the monthly payment down and reduces or eliminates the need for mortgage insurance. That could lower your payment by hundreds of dollars per month, helping you qualify for a larger home.
Government-sponsored low-down-payment mortgages like FHA, VA, and USDA all come with upfront mortgage insurance fees. FHA, for example, requires a fee equal to 1.75% of the loan amount. That’s $1,750 per $100,000 borrowed. It’s wrapped into your loan and does not have to be paid in cash, but it’s still a fee. If you have 20% down, there are no upfront or ongoing mortgage insurance costs.
Why do I keep hearing that I should avoid PMI?
We just discussed some of the “cons” of making a small down payment. Strangely, most homebuyers put PMI at the top of that list.
Private mortgage insurance, or PMI, is a tool. It’s not good or bad, it’s just an option. Those who say that you should avoid it likely don’t understand its benefits.
You can actually come out far ahead by using PMI instead of avoiding it.
Let’s assume home prices go up a conservative 3% per year for the next 5 years.
That means a $300,000 home will be worth $309,000 next year, $318,270 the year after, and so on. In 5 years, it’s worth over $347,000 thanks to the magic of compound interest.
Let’s also assume you chose to buy now with a zero-down loan and that PMI costs you 1% per year, or $3,000. Over five years, you spend $15,000 on PMI. During that time, you paid down your loan to around $268,000 by making regular payments.
You now have $76,000 in home equity and over $64,000 in net increased wealth, even after subtracting PMI costs.
Now let’s say you would have waited for 5 years to buy with 20% down.
You are buying the same house for $347,000. The down payment is $69,400. You’ll notice that most of your savings went simply to pay for the increased home cost. And you didn’t create any wealth during that time. If you had bought five years prior, you would have “created” $61,000 in net new wealth in the form of home appreciation, even removing PMI costs.
Most “experts” argue against PMI because it’s an insurance policy for the lender. That’s true, but you benefit, too, as shown above.
Consider closing costs when figuring out how much to save up
Even with a zero-down loan, you’ll have to pay closing costs yourself or pay for them another way.
And closing costs aren’t cheap. They can range from 1-5% of the home’s price. Costs are for things like:
- Title insurance: Protects your ownership of the home
- Escrow: Ensures all funds are distributed appropriately
- Recording: So the county can document new ownership of the home in public records
- Appraisal: Verifying the value of the home
- Processing: Pays for the processing of your loan
- Loan origination: Covers the lender’s costs
You also have to prepay 6-12 months worth of property taxes and homeowners insurance. Lenders require this because the home is at risk if they aren’t paid. These are called “prepaid items” or simply “prepaids.”
It can come as a surprise to homebuyers that, even though you qualify for a zero down loan, you have to have $3,000-$5,000 in the bank for closing costs.
This may seem like a large amount, but in the next two sections, we’ll discuss how to cover these costs.
Down payment and closing cost assistance
Fortunately, there are many ways to cover not only the down payment, but closing costs, too.
Government down payment/closing cost assistance
Nearly every city, state, and county offers some sort of homebuying assistance. They each have their own requirements such as income limits and assistance maximums. But many of these programs can be used for down payment and/or closing costs. The best way to find programs is Googling “down payment and closing cost assistance in [city] [state] or [county]”. You might be surprised at how many options are available in your area.
Gifts from family
Not everyone comes from a wealthy family. That’s the first thing most homebuyers think when they hear that family members can give toward a real estate purchase.
But family gifts don’t have to be large. A gift of $500 or even $200 would help toward closing costs, right?
Many people don’t think anything of getting $10,000 worth of gifts when they get married, yet argue that their friends and family have nothing to give toward something that will help them financially much more: a house.
For the next year, try asking for down payment and closing cost help in lieu of birthday gifts, wedding gifts, family vacations, and other gifts from family.
Seller concessions, agent credits, lender credits
Did you know that you can receive funds from the seller, real estate agents, and lender for your purchase?
You can’t use these funds toward your down payment, but you can use them to cover closing costs. And if you cover all your closing costs, that makes coming up with a small down payment easier.
These funds are called “interested party contributions,” or IPCs, because a person or entity that is giving the funds also benefits when selling the home.
Why would these parties give toward your home purchase? Simply because they want the home to sell. Paying a few thousand dollars is often worth it.
For conventional loans, interested parties can contribute up to 3% of the sales price when the down payment is 10% or less. For FHA loans, IPCs can be has high as 6%.
Here’s how this might work:
|Loan type||0% down USDA loan|
|Credit from real estate agent||-$1,500|
|Closing cost assistance program||-$500|
|Gift from relative||-$500|
|Required to close||$500|
In this scenario, the buyer would have needed $6,000 to close the loan. But thanks to some research and creativity, she reduced that dramatically.
Other ways to fund down payment and closing costs
Gifts and assistance are not the only way to fund a down payment and closing costs. You can also tap into personal accounts such as savings and checking accounts. You can also liquidate assets.
Maybe you’ve done well in the stock market during the past few years. You can sell stocks and use the cash raised for down payment or closing costs. Just check with a CPA about your tax liability before doing so.
Sell a car, boat, or another depreciating asset
You may have a high-value vehicle — a car, boat, RV, or other “toy” — and now want to invest in an appreciating asset like a home.
You can sell and use the cash toward a home. Just make sure to keep a paper trail of the sale: the original ad, receipt of sale, and funds transferring to your account.
Liquidating retirement accounts shouldn’t be done lightly, but lenders allow it to make a down payment. You may be allowed to borrow against the account for a down payment. Check with your plan provider on rules. Many 401k administrators allow loans or withdrawals to purchase a home. Check with a licensed CPA on the tax implications first.
No down payment mortgages FAQs
Yes. Neither the USDA loan program nor VA home loan require a down payment. Additionally, you can receive gift money or down payment assistance for the entire 3.5% down required on an FHA loan.
Most home loan programs that do not require a down payment require mortgage insurance. However, a VA home loan does not require either one. You have to meet military service minimums to be eligible. Some conventional programs allow for Lender Paid Mortgage Insurance, in which the lender raises the interest rate in lieu of collecting mortgage insurance monthly. But these require a down payment of 3% or more.
This can be done with a combination of choosing a low- or no-down loan such as USDA, FHA, or VA, then getting closing cost assistance. You can receive gifts from family, government organizations, and other eligible entities toward the down payment and closing costs. In fact, 40% of FHA buyers receive some sort of down payment assistance, according to the U.S. Department of Housing and Urban Development (HUD).
Additionally, closing costs can be covered by the seller, agents, or lender, up to certain maximums depending on the loan program. With some research and creativity, many buyers can get all or part of their down payment and closing costs covered by others.
Now’s the time to start
If you read through this entire article (or even just skimmed the section titles), you probably are more confident than ever that you can buy a home.
And rightly so. There are dozens of ways to combine loan programs and assistance types to accomplish your goal.
If you’re ready to start on this journey, now’s the time to move forward.
Fairway is not affiliated with any government agencies. These materials are not from the VA, HUD, FHA, USDA, or RD, and were not approved by a government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.