100% financing home loans are essentially no money down home loans — they’re mortgages that finance the entire purchase price and eliminate the need for a down payment. Large down payments can be tough to save for with current housing prices, especially for first-time homebuyers, which has made 100% financing home loans increasingly popular.
The only true 100% financing mortgages are government-backed loans like USDA and VA. While these loans don’t require a down payment, they do have specific eligibility requirements to qualify like income maximums and military service.
If you don’t meet the eligibility requirements of 100% financing home loans, a 20% down payment isn’t always required — there are low down payment loan options too. FHA and Conventional 97% LTV loans for example, only require 3.5% and 3% down payments respectively. Keep in mind, you’ll likely have to pay private mortgage insurance (PMI) for low down payment loans until you’ve earned 20% equity in the home (FHA loans require PMI for the life of the loan).
For first-time homebuyers with zero down (or a little down), these loan options are worth consideration.See if you qualify for a zero-down mortgage now.
In this article:
- No money down home loans
- USDA home loans (0% down)
- VA home loans (0% down)
- FHA home loans (3.5% down)
- How to buy a home with no money
- Our recommended lenders for new home loans
As a first-time homebuyer, you probably don’t have much money to put down on a home — especially with today’s home prices. A 20% down payment on a $350,000 loan, for example, is $70,000. Not many have that kind of money saved up.
And, while many potential homebuyers don’t have thousands of dollars to put down, there are still thousands of buyers per month that are able to purchase a home.
The key is to find the right loan program for you. For example, if you’re buying outside a major metro area, look into the USDA loan. If you have a military background, you may be eligible for a VA loan. If you have a little money to put down, then an FHA or Conventional 97% LTV may be good choices.
The USDA mortgage loan (also known as the rural development loan) is a government-sponsored loan that exists to help develop rural communities by encouraging homeownership. This program has been around since 1949, but has become more popular in recent years because it requires zero down payment and has lenient credit requirements.
USDA Loan Eligibility Requirements
To qualify for a USDA loan, you’ll need to meet two specific eligibility requirements that other loan products don’t require:
1. You must buy a home within the USDA’s geographical boundaries. Although this program targets rural areas, many eligible areas are suburban or easily accessible from major cities. This is in part due to the fact that the eligibility maps are based on the 2000 census — though, these are slated to be updated in 2019. If you’re eyeing a property outside the city limits, then check its USDA eligibility.
2. The household income must not exceed a maximum limit. This income maximum is not just for borrower income, but includes income from all members of the household even if the individual won’t be on the loan. For example, if you have an elderly parent living with you who collects social security benefits, then that would count towards the household income. These maximums vary by state and county, and the number of people in the household.
USDA Loan Closing Costs & Fees
The USDA mortgage program allows the seller to pay your closing costs, which isn’t an option for all loan types. This means you don’t have to come up with cash to pay closing costs (if the seller agrees, of course). If the seller doesn’t agree to pay these costs, USDA loans allow you to take out a bigger loan than the purchase price if the appraiser says the home is worth more than you’re paying — the home is for sale for $200,000, but the appraiser says it’s worth $205,000. You can take out a loan for $205,000 and use the additional $5,000 towards closing costs. No other loan type allows this strategy.
The USDA loan does charge a 2% upfront fee, which can be financed into your loan and doesn’t have to come out of pocket. It also charges $29 per month on every $100,000 borrowed as an ongoing fee to make the program viable for future homebuyers.
Even with these added costs, USDA loans are a great opportunity to break into homeownership with no money down, low upfront and monthly costs, and great available interest rates.See if you’re eligible for a zero-down USDA loan.
A VA Loan is a government-backed loan available to veterans and active-duty servicemembers of the U.S. military. According to the Veterans Administration, there are over 20.4 million veterans eligible for a VA home loan, but of post 9/11 veterans only roughly 57% own homes. If you are an eligible veteran, then you should consider a VA loan. Not only is it a zero-down loan program, it also doesn’t require private mortgage insurance (unlike FHA and conventional loans), has less strict credit score requirements, and lower overall mortgage rates — usually even lower than conventional loans.
VA Loan Eligibility Requirements
There are specific service time requirements to be eligible for a VA loan. Eligible veterans need to have served:
- 90 days or more in wartime
- 181 days or more in peacetime
- 24 months or the full period for which you were ordered (if now separated from service)
- 6 years if in the National Guard or Reserves
You must also have been discharged under conditions other than dishonorable to qualify. Veterans who were discharged due to a service-connected disability may be eligible, as well as unremarried spouses of veterans killed or missing in action.
VA Loan Closing Costs & Fees
Like USDA loans, VA loans allow for seller-paid closing costs, meaning you don’t have to come with any money out of pocket if the seller agrees. It does charge an upfront funding fee of 2.15% to support the costs of the program. (This percentage goes down as the amount of your down payment increases.) This funding fee is added to the loan principal and doesn’t require upfront cash. A veteran who buys a $250,000 home with zero down will have a final loan amount of $255,375 (excluding closing costs).See if you’re eligible for a zero-down VA home loan.
Federal Housing Administration, or FHA, loans require 3.5% percent down, which can still be quite a lot of money — for a $300,000 home, that’s $10,500. But, there’s an FHA rule that allows you to get around the down payment requirement in a way. According to FHA guidelines, you can receive a gift for the entire down payment. The gift can be from a family member, non-profit organization, fiancee, or other eligible down payment source.
FHA also offers a niche offering called the Good Neighbor Next Door loan. Teachers, police officers, firefighters, and some other public employees, if eligible, can purchase a home with just $100 down. That’s not quite 100% financing, but very close to it.
FHA Loan Eligibility Requirements
There are no special eligibility requirements for FHA loans like other government-backed loans. Though, the loan will need to be used to purchase a primary residence and can’t be used on second homes, vacation properties, or other investment units.
FHA loans have more lenient credit score guidelines than other loan types. Credit scores over 580 are eligible for 100% financing; scores between 500-579 are eligible with a 10% down payment. Lenders may have stricter credit score guidelines, though, even if the FHA allows for lower scores.
You’ll need to meet specific debt-to-income (DTI) ratios — your gross monthly income compared to your debt payments — but they’re inline with other loan programs. The FHA allows up to 31% of your gross monthly income to go towards housing costs like mortgage principal, interest, property taxes, and property insurance, while your debt ratio can be as much as 43% of your monthly income. For example, a household that earns $85,000 per year has roughly a $7,000 gross monthly income. That means the FHA loan allows for as much as $2,200 (31%) for housing costs and $3,000 (43%) for your debts.
FHA Loan Closing Costs & Fees
Similar to the other government-backed loans, FHA loans allow for seller-paid closing costs. If the seller is willing, you may not need to bring any funds at closing to cover those specific costs.
The FHA loan program requires mortgage insurance premiums (MIPs), which you can either pay upfront or add to the loan balance. Paying MIP upfront costs 1.75% of the loan amount. For a $200,000 home with 3.5% down, the upfront MIP costs $3,377. If you add the MIP costs to your loan amount, then keep in mind your loan amount and your monthly costs will increase.
For the annual MIP, the majority of FHA borrowers are charged 0.85% of the loan amount — borrowers with less than 5% down payment, a loan amount of less than $625,500, and a 30-year loan term. The monthly MIP cost is $136 for a $200,000 property with a 3.5% down payment.See if you’re eligible for a low down payment FHA home loan.
Low and no money down home loans
|Loan Type||Down Payment Required||PMI Required|
|Conventional 97% LTV||3%||Yes|
Aside from the down payment, there are additional funds you’ll need to close a loan. These closing costs average between 1% to 5% of a home’s purchase price and include costs like origination fees, title costs, and potentially property taxes and insurance you may have to prepay for some loans.
Typically, it’s the buyer’s responsibility to pay most of the closing costs. That could range anywhere from $2,000 to $5,000 or more. That’s why some first-time homebuyers are surprised when they have to come up with a few thousand dollars even when getting a 100% mortgage loan.
So how do you pay for these extra costs? There are a number of ways.
Gift funds. You can receive gift funds from a family member, non-profit, church, employer, down payment assistance program, or other approved source. Most loan types let you use gift funds to cover closing costs.
Second mortgages. If your first mortgage doesn’t cover enough of the upfront funds needed, you can get a second mortgage. Fannie Mae sponsors a program called Community Seconds® that allows you to receive additional financing to cover your down payment and closing costs from a municipality, non-profit, employer, or another affordable housing program. You can borrow more than the home is worth in some cases, and use that extra amount to cover closing costs.
Lender credit. Lenders can issue a credit toward closing costs if you choose a higher interest rate. For example, if rates are around 4%, then you could take a rate of 4.25% and receive thousands of dollars toward your closing costs from your lender.
Seller credit. When sellers really want to sell a house, they’ll offer a seller credit. Sellers can typically offer between 3% and 6% of the home’s purchase price to cover the buyer’s costs — it’ll be written into the purchase contract. These funds can’t be applied to the down payment, but can reduce or eliminate any need to come up with closing costs.
Credit cards. You can use a cash advance for your closing costs when buying a house. But be upfront with your lender where the funds are coming from, because they will find out. The lender is required to add the additional credit card monthly payment to your debt-to-income ratios, which may disqualify you for the mortgage. And, a bigger credit card balance can reduce your credit score, so be careful.
Down payment assistance programs and grants. Many cities, states, and counties offer some form of down payment assistance. And, there are nationwide programs too. In many cases, you can receive assistance for the down payment and all closing costs associated with a loan.Speak with a licensed and reputable lender.
Why Lenders Still Offer 100% Loans
Many new homebuyers wonder why most types of loans require a down payment. Why can’t the bank finance a 100% of the home’s purchase price? It all comes down to the fact that the bank, lender, or investor wants to be paid back.
After many studies, banks and lending institutions have determined that the higher the down payment on a loan, the lower the chances of a borrower defaulting. In fact, a borrower’s down payment amount is more important in determining risk than even credit score. That’s where the standard down payment amount of 20% come from. Now, anything less than that requires mortgage insurance like PMI, so the lender is guaranteed some money back if the borrower defaults on the loan.
Zero-Down Home Loans Available in 2019
No money down home loans are great options especially for first-time homebuyers. For those who don’t qualify, you’re not out of luck — there are low down payment options as well.Speak to a lending professional who specializes in 100% financing loans.