Getting a mortgage with no money down sounds too good to be true, but the options do exist. Today there are two government-backed programs that do not require you to make a down payment. This means you secure 100% financing. Sure, you start your homeownership off with no equity, but as you make payments and the home appreciates, you’ll gain it.
Does it make sense to take a no down payment required program? We look at the details below.
The No Money Down Veterans Loan
The VA loan is one of the most well-known no money down loan programs. Veterans of the military can borrow 100% of the purchase price of the home. They can even wrap the funding fee for the program into their loan, making their LTV slightly higher than 100%.
In order to qualify for the loan, you must first be eligible. This means you must be a veteran of the Army, Navy, Air Force, Marines, or Coast Guard. You may also be enlisted in the Reserves or National Guard, but you’ll have slightly different service requirements.
You are eligible for the program if you serve enough time in the military. For regular military this means:
- 181 days during peacetime
- 90 days during wartime
If you can prove you have this time served as well as an honorable or general discharge, you may be eligible. You will know for sure if you are eligible by requesting your Certificate of Entitlement from the VA.
If you are eligible for the program, you must meet the following requirements:
- 620 minimum credit score
- Stable employment/income
- Maximum 43% debt ratio
- Adequate disposable income at the end of the month based on your location and family size
The VA has very relaxed guidelines when it comes to qualifying for their loan program. As long as you have a 620 score and have adequate disposable income, you may qualify. They focus on the disposable income because they feel this is how veterans afford their loan and have a low risk of default.
The VA focuses on the amount of money you have left in your bank account each month. They consider this the ‘daily living money.’ They assume if you have enough money left each month, you won’t have to sacrifice. This leaves less room for default on your mortgage. The VA’s focus on the disposable income has made them one of the least defaulted upon mortgage programs
In order to get a VA loan, you will have to pay a funding fee of 2.15% of the loan amount. On a $100,000 loan, this means $2,150. You can wrap this fee into your loan amount or pay it up front. The VA loan does not have any mortgage insurance requirements.
The No Money Down USDA Loan
If you are not a veteran, but you live or plan to live in a rural area, you can secure the no money down USDA loan. This loan provides 100% financing for low to middle-income families that live in what the USDA determines as rural areas. They aren’t areas stuck out in the middle of cornfields. There are homes just outside of the city lines that the USDA considers rural. The USDA bases this decision on the latest census tract. Any areas with a population of less than 10,000 are considered rural.
Eligibility for the USDA loan is based on your total household income. This includes more than just the borrower and co-borrower. It means all adults making an income in your household. For example, if you are married and your spouse’s parents live with you, their income counts. If you have adult children living with you, their income counts.
The USDA totals the gross monthly income of every adult member in the household and then subtracts the following allowances:
- Any children under the age of 18 provide you with a $480 allowance
- Any children over the age of 18 but are in school full time provide you with a $480 allowance
- Any elderly people living with you provide you with a $400 allowance
- Any disabled relatives living with you provide you with a $480 allowance
After figuring out your eligibility income, the USDA determines if you are eligible for the program.
If you are eligible, you must meet the following qualifying requirements:
- Minimum 640 credit score
- Stable income and employment (2 years is best)
- Maximum 29% housing ratio
- Maximum 41% total debt ratio
- No defaults on federal loans
If you meet the above requirements, you have a good chance of securing USDA financing. Like the VA loan, the USDA does charge an upfront fee, but they call it mortgage insurance. The USDA charges 1% of your loan amount. On a $100,000 loan, that means $1,000. You can wrap this cost into your loan.
Unlike VA loans, they also charge a monthly insurance fee. Right now, it equals 0.35% of the outstanding loan amount. Initially, on a $100,000 loan, this means $350 per year or $29 per month. The amount will slightly decrease each year as your principal balance falls.
The common denominator between these two loans is the no money down requirement. You can make a down payment, but you don’t have to. In exchange for this right, you will pay the upfront funding fee or annual mortgage insurance. Both loans are guaranteed by their respective government programs. If you default on the loan, the VA or USDA will pay the lender back a portion of the money lost.
While it will take a while to gain any equity in your home and you have a greater chance of ending up upside down if values fall, they are both great programs. They allow you to become a homeowner right out of the military or as a low-income borrower in a rural area. Shopping around with different VA or USDA approved lenders will give you an idea of the options available to you.Click to See the Latest Mortgage Rates»