What is a zero-down payment?
A zero-down mortgage is a home loan you can get without a down payment. A down payment is the first payment you make toward the home. This is due when you close on the home loan. Lenders calculate your down payment as a % of the total amount you borrow.
The only way to get a mortgage with no down payment is through a government-backed loan. A government-backed loan is ensured by the federal government meaning that if you stop making payments. Your lender and the government step in to make the payments.
There are two types of loans that can help you buy a home.
U.S. Department of Veterans Affairs (VA)
The VA loan is designed specifically for military borrowers. Whereas the USDA loan is aimed at helping moderate and low-income borrowers who are trying to purchase homes in designated rural areas.
To qualify for a VA loan you must be an active service member, member of the National Guard, or the qualified surviving spouse of a deceased veteran.
If you want to buy a house through the VA loan program you must meet certain requirements.
You must:
- Prove that you are eligible through a certificate of eligibility that shows enough entitlement for zero-down financing.
- Meet the minimum credit score. VA lenders won’t accept scores less than 620.
- Meet the debt-to-income ratio. It shouldn’t exceed 41%.
- Verify you meet the free cash requirement.
- Buy a home that you intend to live in. You can’t buy a second home or investment property.
- Pay a funding fee. The funding fee helps cover the taxpayer cost of the program. It is 2.3% of your loan.
U.S. Department of Agriculture (USDA) loans specific to home buying in rural areas
A USDA loan is a mortgage option that helps low-income individuals purchase a home.
The three mortgage programs offered by the USDA are:
- USDA direct loans are issued by the USDA to qualifying low-income borrowers at an interest rate of 1%.
- USDA loan guarantees are issued by participating lenders that provide a low-interest rate and minimal down payments.
- USDA home improvement loans allow homeowners to make repairs and improvements to their houses.
Qualifications for a USDA loan
To qualify for a USDA loan you must meet eligibility requirements. For instance, you must live in the home and it should be your primary residence.
Other requirements include:
- You must be a U.S. resident, noncitizen national, or permanent resident alien
- The house must be in an eligible rural area. You can reference the USDA’s eligibility website.
- Make sure to select the single-family housing guaranteed option after you have accepted the disclaimer.
- USDA loans are designed to help low-income families who demonstrate economic need. That means that your adjusted gross income can’t be more than 115% of the median income in the area. You must also demonstrate that you can cover 12 months of mortgage payments through your assets, savings, and current income.
- A mortgage lender will also look at your debt-to-income ratio. A DTI of 43% or lower is recommended. Most lenders require a score of 640 or better. If you don’t have that score you can always talk with the lender about possible options.