Three Places to Find No-Down Mortgages
Mortgage rates have never been lower, and in some areas of the country, home prices are at about the level they were 9 years ago, before the peak in 2006. Now is a great time to buy a home if, and this is a big if, you qualify for a loan.
One barrier to home ownership may be coming up with a down payment. In late 2011, the median sales price for a US home was $212,000, according to the US Census. This means the average home buyer will need to save $42,400 for a 20% down payment, $10,600 for a 5% down payment, and $7,420 for a 3.5% down payment. A 3.5% down payment is typical for FHA loans. (These numbers do not include other closing costs.)
Three sources offer prospective homeowners no-down mortgages:
- Dept. of Veterans Affairs
- Dept. of Agriculture Rural Development
- State & Local Homebuyer Assistance Programs
Each of these programs have significant restrictions. For example, VA loans are available to eligible veterans, and Rural Development loans apply to properties the Dept. of Agriculture considers rural.
Home buyers must otherwise qualify for a mortgage. This means buyers must have:
- Minimum income history: A minimum of two years at the same employer, or more years in the same field. The self-employed must prepare to document their income.
- Acceptable debt to income ratio: The ratio of debt to income (DTI) must meet the borrower's standards. For FHA loans, for example, mortgage principal and interest, property taxes, and insurance) must be 31% or less of gross monthly income.
- Minimum credit score: Each lender sets their own minimum FICO score. The minimum credit score the FHA will accept is 500, although this represents a small fraction of all loans the FHA allows. Most home loans approved have FICO scores of 680 and higher.
- Adequate financial reserves: We know of no hard-and-fast rule lenders follow for amount of minimum reserves. A smart guideline to follow is keeping six months of reserves on hand in case of unexpected unemployment, illness, or uninsured disaster.
If you check off each of these four items but do not have enough for a down payment, then consider the following three options. If you are weak in one or more of these items, skip ahead to Get Yourself Mortgage-Ready.
No Down Mortgage: VA Loan
VA Loans are designed to help men and women and their spouses who serve their country to buy a home. This directly benefits the service men and women, and indirectly provides a boost to the US housing market by expanding the potential number of homeowners.
In addition to no-down loans, VA loans have competitive interest rates, no private mortgage insurance, low closing costs, lenient credit standards, and assumable loans. The borrower must be a veteran, or the widow or widower of a veteran. If you are eligible for a VA loan, be sure to consider this option carefully.
No Down Mortgage: Dept. of Agriculture Rural Development Loan
The US Dept. of Agriculture (USDA) offers several loan programs to build, buy, or remodel a home. USDA programs are designed to help people buy homes in rural areas. Grants are available to defray the cost of closing, including down payment, to people with low incomes. There is also payment assistance programs to make the "effective interest rate" as low as 1%.
No Down Mortgage: State and Local Home Buyer Assistance Programs
Some states, counties, and cities offer homebuyer assistance programs. These programs vary, and offer:
- Low-interest loans and grants for down payments
- Closing cost grants
- Interest rate buy-downs
- A combination of these three
Some are restricted to low-income and first-time home buyers. Some assist buyers in certain professions, such as teachers, doctors, nurses, police, or fire fighters. Learn about local home buying programs at HUD’s database of state and local home buying assistance programs.
Low Down Mortgage
Mortgages with no down payment are available, but as outlined above, the programs are designed to assist very specific groups of people. Here are two low down payment programs that are designed to help a larger number of people.
Low Down Mortgage: Federal Housing Administration
The FHA is not a lender. Instead, the FHA guarantees home loans and pays investors should the borrower fail to repay a loan as agreed. FHA limits loan amounts and some lender fees. Down payments start at 3.5%. Also, as mentioned above, the FHA approves people with lower FICO credit scores than non-FHA lenders. Follow the link just mentioned to learn more about FHA loans.
Low Down Mortgage: Fannie Mae HomePath
Ever wonder what happened to all of the homes Fannie Mae foreclosed and short sold? The Fannie Mae HomePath (PDF) is an outlet store of foreclosures owned by Fannie Mae. The three big benefits of HomePath are:
- A 3% down payment
- No appraisal fees
- No mortgage insurance
- Fixed-rate, ARM, and interest-only loans
- Lenient credit score standards
According to Bills.com readers, the two most common impediments to qualifying for a home loan are a lack of a down payment or an inadequate FICO credit score.
Fortunately, both of these deficiencies can be solved by taking one step: Create and stick to a a household budget. It’s not glamorous or fun to start a budget, but once you get rolling, the results are undeniable. Studies show people on a budget:
- Free themselves of their credit card debt
- Build their saving account balances
- Pay their bills on time
All of these contribute to boosting a credit score. If your debts are overwhelming, consider debt settlement, credit card counseling, or another resolution strategy. The no-cost Bills.com Debt Coach will help you weigh the costs and benefits to each debt resolution strategy.
To learn how much you can afford to spend on a home, see the Bills.com home affordability calculator.