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What You Need to Know About Mortgages That Require No Down Payment
Choosing to buy a house is a big step. For a lot of first-timers, the cost of the home, the down payment and other fees lead to them having a goal of buying a house with no down payment. But while a no down payment mortgage loan may save you money on the upfront costs of buying a home, it isn’t always the best move.
Before you try to buy a house with no down payment, you should know that there are specific requirements for this type of loan, along with other potential fees and costs, that could catch you by surprise if you aren’t educated on them. You should also consider what the benefits and drawbacks are of buying a house with no down payment. That’s the only way you can decide for yourself how best to move forward with your loan and get the best mortgage rate.
What is a down payment?
A down payment is the money you put down on the home when buying your house with a mortgage loan. Most mortgage loans require the buyer to make some form of lump sum payment, or down payment, when they close on the loan.
Down payment requirements can range anywhere from 3% and 20% of the total cost of the home or more, but it will depend heavily on the lender and the loan type. On average, people pay about 6% of the total cost of the home as a down payment, though 20% is preferable for most lenders.
How a down payment works in your favor
There are benefits to making a down payment when you close on your loan. While it can feel like a significant hurdle to come up with the money, saving up for a large down payment often helps you gain discipline with saving and budgeting. By the time you’ve saved the tens of thousands of dollars you need for a down payment, you’re pretty well invested in saving and finding a home you can afford to pay for over time.
Down payments also go straight into building the home’s equity, rather than paying for interest on the house. When you make a small or no down payment, it takes longer to see a return on your investment, since you pay a lot of the interest early in the loan and have very little equity.
Down payments also reduce the total size of your loan, which is a huge perk if funds are tight each month. If you pay 20% instead of 5%, your home loan is reduced by that 15%, meaning you are that much closer to being free of that particular debt. It will also cut down on what you have to pay each month because you’ll owe less on your home. That could make it easier to fit your home payments into the budget.
Benefits of a no down payment mortgage
You may be in a better spot by making a down payment on a home, but no down payment mortgages also have their benefits. Here are some of the main advantages of buying a house with no down payment.
- You can afford to buy a home more quickly. If you’re on a limited income, it could take years for you to save enough money for a down payment on a home. This can cause major hurdles with home buying — especially if an expensive emergency comes up or rents are high in your area and you’re already stretched thin financially. If you were to buy a home without a down payment, though, you could stop throwing your money away on rent and start paying down your home loan instead.
- You can save for a rainy day rather than losing your savings to the down payment. By not making a down payment, you can build up more savings for emergencies, increasing your security. This is especially helpful if you’re on a tight budget and can’t easily afford to replenish the savings that you spent on the down payment for your home.
- Build equity rather than paying a landlord. As you pay on your no down payment mortgage, you are growing your own net worth in ways you can’t achieve with rent payments. A no down payment mortgage makes building equity in a home possible without a big lump sum upfront, and your mortgage often won’t be much more expensive than rent.
Drawbacks of a no down payment mortgage
No down payment mortgages can be used skillfully if you qualify, but there are potential drawbacks, and you’ll want to mitigate them. Here are some drawbacks to buying a house with no down payment.
- Potential for owing more than the home’s value is higher: Because there are fluctuations in the housing market, owing a large percentage of your home’s value (100%, in the start of a no down payment mortgage) increases the chance that you’ll at some point owe more than the value of the home. This can make selling the home harder if you ever need to move.
- You’re paying interest on more principal. More loan principal means more interest, which is something to consider before taking this route. The more you can cut down on your total loan amount, the less in interest you’ll pay. Making a large down payment could be beneficial for this reason alone.
- A long-term debt can be a challenge if you fall on hard times: Any large debt taken on without much equity can be a challenge down the line if you can’t make payments. Many people rely on the possibility of a Home Equity Line of Credit that lets them access their home’s equity as an emergency measure, and without a down payment, it’s longer before such an option is available to you.
- Expenses like PMI that aren’t needed with larger down payments: Some loans with low down payments or no down payment come with private mortgage insurance (PMI) or other costs, like higher interest rates. As long as you’ve looked into it, you should be fine, but don’t assume that a no down payment mortgage loan is automatically your best option.
Tips on no down payment mortgages
The main two ways that you can get a no down payment mortgage are through government-guaranteed programs — including the USDA mortgage program and the VA loans program.
To qualify for a USDA no down payment mortgage loan, you’ll have to buy in a qualifying rural or suburban area and earn a low or moderate income in most cases. The requirements can change over time, so you’ll want to talk to your lender about whether you qualify for this type of loan.
The requirements for a VA loan are much more stringent. To get a VA loan with no down payment, you’ll need to qualify via military service and be eligible for the loan based on other factors. Some spouses of deceased military members may also qualify, but the parameters are stringent. Like USDA loans, however, these loans have the option of beginning a loan with no money down.
To get the best deal you can on a no money down mortgage, you should:
- Research lenders and loan types thoroughly. This is the only way you’ll know whether a no down payment mortgage is the best deal you can get.
- Compare offers. If you shop around for loans, you can get rates and other info from lenders over a 45-day period without damaging your credit. Each hard pull during that 45-day period will be lumped in as one credit pull, so make sure you do your research during that allotted time.
- Do the math. You may not save much if you’re paying a lot more in interest over the life of the loan. That can increase your monthly payment amounts and just cost you more in total overall. Figure out if that’s the case for your loan, since it will vary with a number of factors.
- Research grants or other assistance programs. There are tons of home buyer programs available to help assist people with down payments or closing costs. Each program will have its own requirements, but make sure you look into them before making any decisions. You may qualify for a grant to help you make a down payment on a home, which could cut down your rate or just help you get a different type of loan.
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