Coming up with the down payment can be one of the hardest parts of getting a mortgage. It’s not only the down payment you need, but also the closing costs. What happens if you don’t have enough to cover both costs? Are you out of luck?
You may still be able to become the homeowner you always dreamt of becoming. These programs are backed by government agencies, giving lenders reassurance should you default on the loan.
Keep reading to learn which loan programs require no down payment.
The VA Loan
Are you a veteran that served in the active military, a member of the National Guard, or the Reserves? If so, you may be eligible for the VA loan, which doesn’t require a down payment. Borrowers can secure 100% financing for a home. All they have to do is cover the closing costs, but there are even ways to get those costs as low as possible. They include asking the seller for help with the closing costs or wrapping them into the loan.
The VA doesn’t fund the VA loans, though. You have to find a VA-approved lender that will approve you for the loan. Each VA lender must abide by the VA’s rules, but they may also add their own rules. This may mean that you will come across lenders with some tougher guidelines. Just keep shopping for a lender until you find one that will approve your situation.
Lenders are willing to provide 100% financing because of the guarantee the VA provides. If a borrower defaults on a loan, the VA will pay the lender 25% of the defaulted amount. This is often more than a borrower would put down on a loan, so it’s a decent program for lenders to offer.
The USDA Loan
The USDA loan is another no down payment loan. In order to qualify, you must buy a home in a rural area and be a low-income borrower. The USDA considers you a low-income borrower if your total household income is less than 115% of the average income for the area.
Now don’t go thinking that a rural home is one stuck out in the middle of cornfields. The USDA has liberal guidelines when it comes to rural properties. They are the properties that are outside of the city lines and have low population rates. In many cases, homes just outside of the city line are considered rural and qualify for USDA financing.
In order to be eligible for the program, though, you must prove that your total household income doesn’t exceed 115% of the average for the area. You must then also qualify for the loan based on the income, assets, and credit scores of just you and the co-borrower – not your total household.
Low Down Payment Programs
If you don’t qualify for the VA or USDA program, don’t despair. There are also low down payment programs available. The two most common are the FHA loan and the conventional loan.
FHA loans aren’t just for first-time homebuyers as many people assume. Anyone that has a credit score higher than 580, has 3.5% to put down on a home, and has a debt ratio that doesn’t exceed 31/43, may qualify.
In some respects, the FHA loan can qualify as a no down payment loan, because the FHA allows you to receive 100% of the down payment as gift funds from a qualified person, such as a relative or employer. As long as your credit score is at least 580, you are eligible to receive 100% of the down payment as a gift.
Even conventional loans can be a low down payment loan. You can put down as little as 5% on the conventional loan. The tradeoff for this low down payment, though, is the Private Mortgage Insurance you will pay. Lenders will require you to pay this insurance, which protects them should you default, until you owe less than 80% of the home’s value.
If you qualify for a no down payment or low down payment loan, keep in mind that you’ll have little to no equity in your home for a while. The first couple of years of mortgage payments will mostly consist of interest, with a small amount hitting the principal. As long as you plan to stay in the home for a while, it can be an affordable way to become a homeowner without having to clear your bank account just to make the down payment.