When it comes to qualifying for a mortgage and purchasing a house, there’s very often two main obstacles for first-time buyers. The first issue, which we explored here, is getting your credit score to a place where you can qualify for an affordable mortgage payment, and from there the second biggest issue often is having enough money on hand for a down-payment, which can be tricky for some people, even when they have steady employment.
“Lenders require a down payment — 20% is often the case — in order to lower the risk that the borrower won’t pay their bills, but this is often a large roadblock for homebuyers,” says Tabitha Mazzara, Director of Operations at mortgage lender MBANC. “So there are a few ‘Zero Down’ options, and some low down payment options, often backed by the government, designed to help remove that roadblock.”
Mazzara adds that “a no-down-payment mortgage might be right for you if you have steady employment and good credit but are unable to save money for a down payment.”
Of course, government-back Zero Down mortgages require a few qualifications, and navigating the world of low-down payments can also be tricky. What you can qualify for will depend on a variety of factors, from your location and income level to whether you served in the armed forces, but to help you make sense of your options, we talked to lending experts about what you need to know about zero and low-cost mortgages.
There are two main government-backed programs designed to help people circumvent down payments: VA Loans and USDA Loans.
The U.S. Department of Veterans Affairs offers VA Loans, which we explored here, which will cover the cost of a down-payment for service members, veterans, reservists, National Guard members, and in some cases, their spouses. The loan will come from a private lender, but the government will back a portion of it, allowing the borrower to eschew a down payment, which will get them into a house quicker.
They can also often qualify for a lower interest rate than the industry standard, which will lower their monthly payments. These loans require a minimum credit score of 580.
The second government program designed to help people with down payments are what is called USDA Loans, which are issued by the U.S. Department of Agriculture. “These loans are designed to help low- and middle-income people own homes,” says Mazzara. “With these, the qualifications fall on the homes themselves: they must be smaller than 1,800 square feet and be in rural locations.” These loans require a credit score of at least 640, she says.
Don’t read too much into the name of the program, advises Mazzara. “When people hear ‘U.S. Department of Agriculture,’ they think the program might be only for people planning to buy a farmhouse,” she says. “Not true. The program is limited to certain geographic regions, so, for example, downtown Los Angeles is out, but neighboring areas like Glendale and Long Beach have eligible properties.
“Primarily, the goal of the USDA program is to help people from low- and moderate-income households, but what’s considered a ‘moderate’ income in, say, California, might be very different from the number for Mississippi. USDA’s income eligibility requirements vary quite a bit by location.”
You can verify your eligibility by visiting the USDA website: https://eligibility.sc.egov.usda.gov , but Mazzara says to “make sure you go to the site with a .gov URL — that’s the official site. Plenty of other sites have information about USDA loans, but the .gov is the only real one.”
The USDA sets new income limits every year in the spring, and these limits are capped around 15% above the average median income for households in the area, according to Bill Packer, Executive Vice President and Chief Operations Officer of American Financial Resources, Inc. According to Packer, “the standard income limits for the Single-Family Housing Guaranteed Loan Program as of May 12, 2021” are as follows:
–1-4 member households increased to $91,900
–5-8 member household increased to $121,300*
Zero Down Mortgages aren’t particularly common in the private lending market, as down payments are a way for lenders to protect against the borrower defaulting. Without the backing of the government, lenders are often weary to completely eschew down payments, but some programs do exist for people with the right qualifications.
“Government-backed loans are not necessarily the only Zero Down options available,” says Packer. “Some grant programs can be used in combination with agency programs, as well as some banks in-house programs.”
According to Lending Tree, 620 is the lowest score possible to qualify for a no down payment mortgage. If you qualify, Packer advises that “finding a licensed loan officer with a broad range of programs and down payment assistance programs is a critical step to making sure you are being provided the best information given your situation. I generally recommend that folks contact a national lender, a local mortgage broker, and a local credit union, then compare the information and find the right professional for you.”
Mazzara says that another option for people without the savings for a down payment are what is known as “80/20 or Piggyback loans,” which is a second loan that takes care of the down payment. “You might be able to get that 20-percent down payment with another loan on top of your 80-percent loan. However, these loans will come at a higher interest rate.” You can also lower the overall cost here a bit by putting down a 10% down payment, and only borrowing 10% for rest of the piggyback loan.
You could also see if you qualify for a grant, which can help with your down payment and which you won’t have to repay. “Several lenders, including ours, participate in down payment assistance programs that provide grants covering the down payment,” Packer explains. “So, here again, there is no cash investment from the borrower; instead, the organization provides a grant in the amount equal to the down payment.”
Grants are offered by government programs such as the Federal Housing Authority as well as private organizations. Each grant will come with its own requirements, and Packer says there are grants available for “low-to moderate income borrowers, or first responders, or educators, or first time home buyers…as well as many others.” Again, a credit union or mortgage broker can help you determine if there are any grants you qualify for.
The main advantages of Zero Down mortgages are that you don’t have to save money for years to buy a home. But there are some potential drawbacks that you should be aware of before making any decisions.
“Not having money in the bank cues potential lenders that you’re at a higher risk of foreclosure and gives them an excuse to charge you a higher interest rate,” says Mazzara. “Even if you do get a decent rate, you’re borrowing that much more money and incurring more interest charges.”
If you get a loan with a down payment of less than 20%, you will likely have to get private mortgage insurance, otherwise known as PMI, which is intended to protect the lender. It is typically “arranged by the lender and provided by private insurance companies,” says Mazzara. “One of the reasons for this is because the more you owe on your home, the greater the chance you will end up underwater if the market fluctuates downward.”
If you don’t qualify for USDA or VA loans, you can always consider loans from Freddie Mac. Freddie Mac is a private lending company that was chartered by congress in 1970 to help support of homeownership and rental housing. Freddie Mac loans are not available directly to the public, instead, the company purchases loans from lenders, which helps them have enough funds so that they can make more mortgage loans to other borrowers.
One popular program is the Home Possible® Loans From Freddie Mac.
“The down payment can be as little as 3% — which is a lot more attainable than the usual 20% down,” says Mazzara. “Your income has to be no more than 80% of the median income in your area, so this program, like USDA, has variable eligibility depending on where you intend to purchase your home. Freddie Mac has an eligibility calculator at their website which is a good place to start.” If you are a first-time homeowner, you will be required to go through a homeownership education program before you qualify.
Another possible option are Down Payment Assistance programs, which can reduce the price of a down payment via, depending on the program and state you live in, can come in the form of grants, loans, deferred loans (which are loans that come with the option of forbearance, which allows you to temporarily stop principal payments for up to a year) and forgivable loans (which don’t need to be paid back). A mortgage lender can help you figure out what you might qualify for.
“There are many DPA programs available,” says Packer. “What’s important to know is that some are quite restrictive as to who may qualify (county or income limits are common restrictions), while some, like the Advantage DPA, have very broad-based qualifications.”
Finally, keep in mind that while a 20% down payment is common, it’s not a law written and stone, and a lender might be willing to give you some wiggle room to come up with a solution that works for your situation, especially if you are a first-time buyer. But keep in mind, that while you might not have to make as big of a down payment, you will eventually have to pay the entire mortgage.
“There’s usually significant flexibility, and most first-time homebuyers actually pay much less than 20 percent,” says Mazzara. “That means a bigger loan, however, and bigger monthly payments. You may also be required to buy mortgage insurance, further nullifying the benefit.”
If you have a low credit score, Mazzara says you can still apply for the various programs that can help you, but she says you would be better off taking some time to get your credit score up first, by concentrating on working down your debt and making your monthly payments on time.
“There are options, yes, but I advise prospective buyers to get their credit situation whipped into good shape — this will be the very best option in the long run, because you’ll be eligible for loans with lower interest rates,” she says. “If a lender is going to take a risk on someone with bad credit, they’re going to have to make it worthwhile, and they do that by charging higher interest.
“Don’t be discouraged by this fact — definitely try to apply for the programs above,” she adds. “But if you’ll be keeping more money in your pocket by not having to put it towards a high down payment, then use that money to pay debts, beautify your credit score, and re-establish yourself as someone who pays back what they’ve borrowed. If you can improve your debt-to-income ratio, you’ll have more options to choose from.”
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