Finding home loans with zero down was an easy task years ago. Today, though, it’s not as simple. Lenders tightened their restrictions and for good reason. The risk of default was too high. Luckily, things have changed. There are several loan types available for no money down. Here we discuss those loan types and how you can qualify.
The first loan type with no down payment requirements is the VA loan. This flexible loan option has one large restriction. You must be a veteran or a spouse of a deceased veteran. If you meet this requirement, you have the benefit flexible guidelines including:
- No minimum credit score (some lenders require at least a 620, which is still low)
- Maximum total debt-to-income ratio of 41%
- Certificate of Entitlement (showing you are entitled to a VA loan)
- Purchase of a safe and sound home passing the VA appraisal
The VA loan doesn’t require annual mortgage insurance. They do, however, charge an upfront fee. Right now, borrowers pay 2.15% of their loan amount at the closing.
They also don’t focus on debt ratios. They rather focus on your disposable income. The money you have left after paying your monthly obligations is your disposable income. You must satisfy the minimum amount the VA requires for this loan program.
USDA loans don’t require a specific job or status, but they only fund purchases of rural properties. The USDA sets the boundaries for these rural properties. Rural may not have the same meaning you expect. Many times it’s properties just outside of the city lines. The USDA changes the property boundaries with each new census tract.
You must also meet the income requirements of the USDA loan. The less you make the better, in this case. The USDA loan is for low to moderate-income families. The USDA has income guidelines you can view here.
USDA loans don’t require a down payment. They also have flexible qualification guidelines. They are as follows:
- You must be a citizen of the United States
- Your front-end ratio can’t exceed 29% (this is your mortgage payment)
- Your back-end ratio can’t exceed 41% (this is your total monthly debt)
- You must prove consistent income for the last 2 years
- You must have decent credit with no recent collections or delinquencies
The USDA does allow credit scores as low as 580 for this program. But, if you have a score higher than 620, lenders can streamline your approval process. Scores lower than 620 require a more in-depth evaluation of the loan file.
USDA loans do charge annual mortgage insurance. They also have an upfront funding fee. Right now, borrowers pay 1% of the loan amount up front. They also pay 0.35% of the outstanding loan amount per year. The lender divides this amount into 12 equal payments throughout the year though.
The Next Best Thing
There are options even if you aren’t a veteran or don’t want a rural property. You may not be eligible for a zero down payment loan. But, you can get a low down payment loan. There are a few options. The most common is the FHA loan, though.
FHA loans are another government-backed product. It requires a 3.5% down payment. On a $100,000 loan, this means $3,500. While it’s money you must come up with, it’s not a lot. Let’s compare it to a conventional loan. For the best rates, lenders prefer a 20% down payment. On the $100,000 loan, this means $20,000. That’s $16,500 more than the FHA loan.
FHA loans have similar guidelines to other government-backed programs. They are as follows:
- Minimum credit score of 580
- Front-end debt ratio no higher than 31%
- Back-end debt ratio no higher than 43%
- No recent collections or delinquencies on your credit report
FHA loans also have upfront and annual mortgage insurance. This amount equals 1.75% of the loan amount. You can pay it at the closing. You can also roll it into your loan. The annual mortgage insurance charged by the FHA equals 0.85% of your outstanding loan amount. This insurance lasts for the duration of the loan.
How Zero Down and Low Down Payment Loans are Possible
It might seem odd that zero down payment and low down payment options are available. How can lenders take such a risk? You don’t have any money invested in the property. Yet the lenders can give you a low interest rate. It comes down to the guarantee the government provides. Each agency, the VA, USDA, or FHA, offers the lender a guarantee. This means they will pay the lender back a portion of the funds they lose if you default. They don’t pay 100%, but it’s close enough. The money pays the bank back. The government then takes possession of the home. They sell it and make their money back. This way they can guarantee more loans.
Should You Take a Zero Down Payment Loan?
Zero down payment loans have their benefits. Many more people can qualify for them. They also offer low interest rates. You must make payments for quite a while before you see any equity in the property, though. If you will live in the home for the long-term, it could pay off. You secure a lower interest rate and walk away with plenty of equity. If you don’t stay in the home long-term, though, it may not make sense. You won’t see a return on your investment for at least a few years. Selling a home isn’t free either. If you move too soon, it could cost you money.
Consider all of the circumstances before choosing a zero down payment loan. If you are a veteran, it’s a no-brainer. The VA loan offers many benefits. USDA loans offer great benefits for borrowers in a rural area too. If you don’t have the money for a down payment, take advantage of these programs. Even if you do, you can always pay your principal down faster. If it helps you secure a lower interest rate or qualify with less than perfect credit, it’s a great answer.
Shop with different lenders and evaluate your options. In the end, you can secure a great loan for little money!