Are No Down Payment Mortgages a Good Idea?

What Are No Down Payment Loans?

As the name suggests, a no down payment loan doesn’t require putting down any money upfront to buy a house.

Conventional mortgage loans require a down payment of at least 3% of the purchase price of the home. When you put down less than 20%, however, you’ll typically have to pay private mortgage insurance, which adds more expense to the monthly payment. Even with a loan that requires a smaller down payment, you’d still need to save thousands of dollars to put toward the purchase.

With this in mind, no down payment loans can be helpful if you don’t have a lot of cash saved up for down payment costs. Typically, you can find no down payment loans through government mortgage programs or special lender programs.

Where to Find No Down Payment Loans

Two main government programs offer no down payment loans:

• USDA loans from the U.S. Department of Agriculture
• VA loans from the Department of Veterans Affairs

Neither of these loans requires a down payment for buyers, but you might still have to meet other credit score, income or location requirements. For example, to be eligible for a VA loan, you need a Certificate of Eligibility. You would need specific documents to prove you are a veteran, such as a copy of your discharge or separation papers.

When it comes to special lender programs, the field is a bit more varied. Many programs focus on people working in specific occupations, including teachers, firefighters, medical professionals and other public service employees. Some programs are geared toward people interested in buying a home in a particular neighborhood.

Some of these programs might not completely erase down payment requirements, but they may drastically reduce or lower the price of a home so it’s more affordable. The criteria to get a no down payment loan depends on the lender and the program, so you need to search for programs in your state or local area to see what’s available.

Pros and Cons of No Down Payment Loans

While a no down payment loan can help get you into your dream home, it’s essential to weigh the pros and cons before deciding if this is the right option.

Pros

• It can allow you to buy a home without having to put down a large chunk of your savings.
• You can buy a home sooner than you would if you had to save up for a large down payment.

Cons

• You’ll likely pay more interest over the life of the loan because you’re borrowing more money.
• You may not be able to afford as much home as you could if you put money down.
• You’ll have less equity in your home because you’ve put down less money.
• There might be additional fees involved.

What Are Some Alternatives to No Down Payment Loans?

If you’re in the market for a new home but don’t have the money saved up for a down payment, you may have other options. Before you sign on the dotted line, make sure you explore other alternatives:

• Wait and save up for a down payment. Setting a goal number, creating a budget, cutting costs and automatically directing a portion of each paycheck toward your goal can help you get closer to putting a down payment on a house.
• Ask relatives for a loan for the down payment. If you don’t want to take out a loan, another option is to ask relatives for money to use as a down payment. This can be a difficult conversation, but it may be worth it if owning a home is important to you.
• Make use of government resources. There are many government programs that offer help with down payments.

When you’re looking to buy a house, the down payment can be one of the biggest hurdles. But it doesn’t have to be impossible—there are many alternatives to no down payment loans.

The Bottom Line

A no down payment loan can be a great choice if you haven’t been able to save up but are otherwise eligible to purchase a home. But remember, even a tiny down payment can be helpful because your interest rate might be more favorable, your monthly payment will decrease, and you’ll avoid paying extra fees that come with these types of programs. Whatever option you choose, you’ll need to be well-prepared to buy a home with a strong credit score and good financial habits; your future self will thank you.