Are Zero Down Payment Mortgages Really a Thing?

Are Zero Down Payment Mortgages Really a Thing?

One of the largest hurdles to owning your first home is coming up with the down payment. But the truth is that have to come up with a large down payment is a myth. You don't have to have 20% down to buy your first house despite what your parents told you. 

These days you can get a mortgage with little or even no money down from several sources. And you can get a zero down payment mortgage without outrageous interest rates too. There are some caveats, of course, and not everyone will qualify for every type of loan. 

Here are the ins and outs of getting a mortgage with no money down. And if you don’t qualify for a zero-down payment mortgage there are still options for a mortgage with just a little money down.

Zero-Down Payment VA Home Loans

The Veterans Administration has been offering zero-down loans for decades. To qualify for a mortgage with the VA, you must be a veteran, active service member or an eligible surviving spouse.

VA loans are not actually provided by the Veterans Administration. A VA loan is still a mortgage provided by a private lender. It is, however, a loan that is backed by the Veterans Administration in order to give qualifying candidates better terms. One of those favorable terms is no down payment.

There are over 20 million veterans living in the United States today. There are over 1 million active servicemen. In addition to the 5 branches of the military, reservists can also qualify for a VA loan, though there are more restrictions.

Being a retired or active duty member of the armed forces or an eligible spouse is not the only requirement for securing a VA loan. Character of service, duty status and length of service all come into play. Some of these restrictions are lower if you've served in active duty during wartime so check out the Veterans Administration's website for full details.

Loans will also restrict you to the type of home you can buy and how you'll use it. For instance, to secure a VA loan it will have to be your primary residence or if you're on active duty, it will have to be occupied by a spouse and/or your dependents.

The VA and the private lenders offering the loan also require that you have satisfactory credit and that your debt-to-income ratio, your ability to repay the loan, is solid. A Certificate of Eligibility (COE) will be needed but your lender will be able to help guide you through the steps to acquire one. 

Since the Veterans Administration is backing your loan you won't be required to purchase mortgage insurance like you would with an FHA or conventional loan. That's because the VA guarantees that you are unable to make your mortgage payments they will reimburse the lender. If you’ve served in the military and meet the requirements for a VA loan take advantage of this zero down payment mortgage option.

Zero-Down Payment Rural Home Loans

It's no secret that most people live in suburbs or counties that surround larger metropolitan areas. Higher salaries, easy commutes, larger job pools have us all living in densely clustered areas throughout the country.

Living in a rural area though can have its perks too. The U.S. Department of Agriculture has a few options available if you're willing to live in the right place. You don't often think about home loans when you think about the USDA but they offer highly competitive loans, such as the Single Family Housing Guaranteed Loan Program.

These loans have geographic and income restrictions but offer guarantees, like the VA, and zero interest mortgage options designed for low to moderate income families looking to purchase a home. The best part though is that it’s been over a decade since the USDA has updated its maps. That means that what once was rural may now be suburban. You can secure a USDA loan, in some instances, and not live in the middle of nowhere. 

With a zero down loan from the Department of Agriculture you'll have to live in the home you purchase. This is great for first time buyers and those moving from one home to another. It is not possible to use a USDA loan for investment properties.

Determining if the home you want to buy is eligible for a loan from the USDA can be a bit of a pain. You'll need to go to the Department of Agriculture's website and use their eligibility map. To say that the USDA website looks like it’s straight out of the 90s is being polite. You'll have to input the individual address of the home you're considering purchasing to see if it is in an area covered by the USDA.

With a little digging, however, you may uncover the perfect location and the perfect home for you. If a 100 page document listing zip code and income requirements is more your thing than check out this pdf file. It is at least broken down by state. 

If you do find the perfect home in the right location you'll need to fill out the Department of Agriculture's income eligibility document. It's a big pain in the butt frankly but well worth it to get great mortgage terms on the home of your dreams.

Whether you want to live in a rural area or hope to find an area covered that is more suburban these days, the USDA loan program offers options that are better than almost any loan out there. Taking the time to see if you qualify is well worth the effort. 

Low Down Payment Home Loans

Despite popular misconception, you don’t have to have a 20% down payment to purchase a home. While zero down payment loans are limited, most conventional loans and FHA loans will still accept you if you have less to put down. 

Conventional loans may still be available for as little as 3% down, though you’ll have to have stellar credit and mortgage insurance until you reach 18% equity. FHA loans also let you slide on the down payment. Options are available to those with lower credit with a down payment of just 5%. They will require you to have mortgage insurance for the lifetime of the loan though, unless you refinance so make sure the loans fit your needs and circumstances. 

Bottom Line

Having less than 20% to put down on a home does not disqualify you from buying a house. You may have to pay a little more in interest but it can still be a smart move either way. If you are or were a member of the military you may be able to get a mortgage with no money needed for your down payment. Also, if you’re flexible about location a USDA home loan offers some terrific options and you’ll be surprised by what they consider to be rural. 

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