Saving up for a down payment to access a mortgage may be difficult for some borrowers. Luckily, many lenders offer zero-down mortgages with no down payment requirement. You can take out a mortgage to fully finance the purchase of a house and pay only the standard closing costs and lender fees.
Zero-down mortgages come in different shapes and sizes, with varying features, lenders, and eligibility requirements. Here’s what you need to know about your options for securing a zero-down mortgage.
The most popular option for a zero-down mortgage is a government-backed loan issued by a lending institution. These loans are guaranteed by the federal government, making them less risky for lenders. If you default on payment, the government steps in. As a result, borrowers with less-than-perfect financial profiles also stand a good chance of getting a no-down-payment mortgage.
The eligibility criteria to qualify for government-sponsored loans are usually strict, but they aren’t your only option. Many lenders offer other mortgage options with zero down payment.
VA loans are backed by the Department of Veterans Affairs. You are eligible to borrow a VA loan if you currently serve in the armed forces, are a member of the National Guard, are a veteran, or are a surviving spouse of a deceased veteran. Veterans with disabilities are also eligible to borrow under the program. The VA is only responsible for monitoring the loan program and guaranteeing the loans. The mortgages are provided by private lenders.
These loans don’t require the borrower to obtain private mortgage insurance (PMI). A one-time VA funding fee is the only cost. VA loans have competitive interest rates, often lower than what’s payable for a conventional mortgage. This allows borrowers to save more over the life of the loan.
If you fulfill the eligibility criteria, lenders will still use your credit score to assess your risk profile to price the loan. However, unlike conventional mortgages, where a lot depends on your credit profile, you don’t need a perfect credit score to borrow VA loans.
Loans backed by the US Department of Agriculture are an option for low-income families to purchase a house without making any down payment. However, there are a few requirements you must fulfill to be eligible.
Your income must be below the adjusted income level of the area where you want to purchase a house to qualify. The house must also be located in an eligible rural area.
Like VA loans, the USDA guarantees the mortgage, but it is offered by a local participating lender. USDA loans allow you to get the mortgage at a lower interest rate, but the lenders decide who is eligible to borrow. You may still need to furnish PMI. Moreover, you cannot refinance the loan for interest-rate savings, and the lender may impose penalties for prepayment.
USDA loans are only available for owner-occupied primary residences. Other eligibility criteria for USDA loans include:
- The borrower should be a citizen of the United States or a permanent resident.
- The monthly installment payment, including insurance and taxes, should be less than 30 percent of the borrower’s monthly income. Any other debt obligations cannot be more than 41 percent of the income.
- The borrower should also have had a dependable income for at least the past 24 months and no accounts reported for collection in the past 12 months.
Note that the USDA publishes the eligibility criteria yearly based on property location and income to ensure the beneficiaries who need them the most can access the loans.
When you aren’t eligible for a VA or USDA loan, there are other zero-down mortgage options available through private lenders. If you’re a well-qualified buyer, some lenders will be willing to cover up to 100 percent of your home purchase. While you’ll generally be required to pay PMI and closing costs, some lenders reduce or even waive these fees. Shop around and see what’s available to you.
Private loans might also be focused on certain niches, such as physician loans, designed specifically to assist physicians or medical fellows in buying a house. Doctors tend to have a significant amount of student debt to pay off when they start working. Existing debt liability usually makes such candidates unsuitable to borrow conventional mortgages. Physician loans typically don’t require a down payment or PMI, and lenders relax the debt-to-income ratio requirements.
Finding the right lender for a zero-down mortgage is critical.
In the case of VA loans, you can approach a private bank, credit union, or mortgage company that offers such loans. Approved lenders will send the borrower’s paperwork to the VA for verification and processing. In the case of USDA loans, you can approach several lending institutions across the country that the US Department of Agriculture has approved for its loan program. Many financial institutions extend no-down-payment loans to well-qualified buyers.
To locate the best lender for your needs, find one that has expertise in extending the type of loan you’re looking for. Lenders that understand the nitty-gritty of zero-down home loans can better help you secure the loan that fits your needs. And don’t just look at banks. Credit unions are an excellent option for borrowing no-down-payment loans, and they often offer other incentives, such as lower fees.
In the Pacific Northwest, Solarity Credit Union offers zero-down mortgage options in a number of forms. They participate in the USDA loan program, for one, and provide USDA loans at a reduced interest rate with the possibility of including the closing costs in the loan amount. For homebuyers who aren’t eligible for government-backed loans, Solarity’s Home Now zero-down mortgage is available to well-qualified buyers with waived lender fees and reduced private mortgage insurance. You’ll be on your way to homeownership before you know it.