These days, it’s a lot harder to find “mortgages with no money down,” as banks and mortgage lenders have toughened up quite a bit over the past few years thanks to the devastating financial crisis that took place.
They began requiring larger down payments because home prices weren’t appreciating like they once were; in fact, they were dropping steadily, shifting more risk to the lenders that issue low-down payment loans.
If homeowners don’t have any skin in the game, otherwise known as home equity, there’s a better chance they’ll walk away from their mortgages if they fall behind on payments, leading to costly foreclosures.
Conversely, if a homeowner is required to put down say 10 percent of the purchase price, the lender has a safety buffer, and the homeowner is more likely to continue making payments, as they won’t want to lose that initial investment.
Put simply, the reduced availability of 100% financing is probably a lack of lender confidence with regard to the direction of home prices. Once things improve, we’ll probably see a lot more zero down stuff making its way to market again.
No Money Down Mortgages Used to Be the Norm
Back in 2006 and 2007, you could easily obtain 100 percent financing from nearly any bank or lender in town, with the most common structure the 80/20 combo loan, which is a first mortgage for 80 percent of the purchase price and a second mortgage for the remaining 20 percent.
This allowed a home buyer to put nothing down and avoid mortgage insurance because the first mortgage remained at the key 80% LTV threshold.
These high-risk financing deals were rampant, and most homeowners took the bait and chose not to put any money down, assuming their home would appreciate endlessly. This explains why millions of American homeowners became underwater on their mortgages and/or faced foreclosure.
So what options do potential homeowners have nowadays when it comes to a mortgage with no money down? Amazingly, it’s still pretty easy to get a mortgage with zero down or close to no money down.
There was a time, not long ago, when you could actually get an FHA loan with no money down at all thanks to seller paid downpayment assistance, which has since been outlawed.
Additionally, mortgage financier Freddie Mac offers its Home Possible 97 Mortgage, which requires as little as three percent for down payment. Sister Fannie Mae offers a similar loan program called HomePath, which calls for just three percent down as well and allows gift funds for the down payment.
Both Freddie Mac and Fannie Mae briefly stopped offering LTV ratios above 95% in 2013, meaning their 3% down loan programs were no longer offered for a period of time.
But in late 2014, the pair reintroduced a 97% LTV option that the masses could take advantage of with even more flexible underwriting guidelines.
How to Get 100% Mortgage Financing Today
- VA loans
- USDA loans
- 100% financing from credit unions
- FHA’s $100 down payment loan program
- HUD Good Neighbor Next Door program
- Various state housing finance agency programs
I provided a little background above about the rise and fall of zero down financing. Now let’s look at what’s left.
Today, the most widely used zero down mortgage programs are offered by the USDA (only in rural areas) and the VA (military and their families). Unfortunately, these programs are only available to those who purchase properties outside the city or to those who serve this country.
If you don’t fall into either of those categories, it might be harder to secure a mortgage with nothing down.
However, that doesn’t mean it’s impossible. For example, NASA (astronauts) and other government agencies offer so-called high loan-to-value mortgages for select customers. And some private lenders even exceed 100 percent financing (125% second mortgages) despite the recent housing bust!
You can also buy a HUD home for as little as $100 down if you use FHA financing, which is pretty much zero down when we’re talking about the purchase of a home. However, you must be an owner-occupant and the homes are located primarily in Southeastern states.
Nationwide, if you are a law enforcement officer, teacher, firefighter or emergency medical technician, you may also qualify for “The Good Neighbor Next Door” initiative, which offers HUD-owned single-family homes (one-unit) to eligible buyers at a 50% discount AND with as little as $100 down.
Also be sure to look into what’s being offered by your state housing finance agency. For example, California home buyers can take advantage of the MyHome Assistance Program, which offers 5% of the purchase price to cover the down payment and/or closing costs. Combined with a first mortgage this could give buyers the opportunity to get a home with nothing out of pocket.
It’s also possible to get a Fannie Mae loan with an LTV of 105% thanks to a Community Second, a subordinate loan that can provide necessary funds for all of the down payment, closing costs, and even property renovations.
Freddie Mac has a similar program called an Affordable Second, which can be used for down payment
assistance, closing costs, and/or renovations.
Recently, TD Bank launched a 3% down mortgage as well that carries no mortgage insurance.
Qualifying for Zero Down Home Loans
- Only available on one-unit primary residences
- Purchases only, no refinance transactions
- Loan amounts limited to conforming or lower
- Must provide full documentation
- Often must have two months of asset reserves
- Often must be a fixed-rate mortgage
- Often must be a first-time buyer
- Must setup an impound account to pay taxes and insurance
- May be subject to higher fees
Of course, not everyone qualifies for these types of loans because they’re reserved for certain types of buyers. I’ve provided a general list of requirements above that apply to many of these programs.
Typically, a zero down home loan will only be available to those purchasing a one-unit primary residence. This may include condos along with single-family homes.
However, multi-unit properties and secondary and investment properties will likely not qualify for maximum financing.
Don’t expect a 100% refinance these days, especially if you want cash out.
Often, you’ll need to be a first-time buyer and/or earn an income that is at or below the median in the county you wish to purchase the home. And you’ll need to document your income, employment, and assets.
This is to ensure that these types of programs foster safe, responsible, and affordable lending for those who need it most. In other words, if you’re a real estate investor you probably won’t be able to take advantage of these programs.
They are intended to help those most in need, who want to realize the dream of owning a home, but don’t necessarily have the means.
Outside the VA and USDA, which are pretty liberal when it comes to credit scores, you might be required to have good or excellent credit to qualify for zero down financing. I’ve seen credit unions require 720+ FICO scores. So if you want more options, work on your credit beforehand!
It may also be a requirement to take out a fixed-rate loan, as opposed to an ARM, to ensure you can keep up with monthly payments. Lenders know it’s riskier to give you a loan without a down payment, so they may limit you to a 30-year fixed only.
Loan amounts are typically capped at or below the conforming loan limit as well, unless it’s a specialty product, such as the POPPYLOAN in the Bay area, which is reserved for high-earners who lack down payment funds.
Lastly, expect to have to open an impound account to pay your taxes and insurance monthly with your mortgage payment. This is generally a requirement for anyone who puts less than 20% down.
As a rule of the thumb, the weaker the borrower credit profile and the more complicated the loan scenario, the lower the maximum loan-to-value.
For example, if you’ve got a bad credit score or an investment property you want financed, you won’t be able to get anywhere near a no money down mortgage.
But if you’ve got great credit and a steady job, 100% financing may be well within reach. So take the time to shop around to discover all the options available to you. It’s always surprising to see what’s out there…
The majority of banks and credit unions these days are offering mortgages with just five percent down, but only for conforming loan amounts.
Generally, jumbo loan amounts require higher down payments, so don’t expect to get 100% financing. The closest I’ve seen recently is 95% LTV, which is actually pretty aggressive and not something most lenders offer.
Use Gift Funds to Get 100% Financing
One last note. While many 100% financing programs have come and gone, there are still quite a few loan programs that require just three percent down or less.
In order to obtain a zero down loan, you can ask an eligible donor to provide you with a gift for the difference. So if it’s an FHA loan that requires 3.5% down, get that 3.5% in the form of a gift from a family member.
Likewise, if it’s a conventional loan that calls for three percent down, ask a relative or your spouse for the three percent in the form of a gift. That way you can buy a home with nothing out of your own pocket.
In many cases, a minimum contribution from the borrower’s own funds is not required, so it’s effectively zero down despite the LTV coming in below 100%.
While it’s not traditional zero-down financing, the end result will be the same. In fact, your mortgage payment will be lower because the amount financed will only be somewhere between 96.5%-97% of the purchase price.
However, keep in mind that 2-4 unit primary residences, second homes, and high-balance loans typically require a five percent minimum contribution from the borrower’s own funds. So this trick won’t work on all transactions.
Pros and Cons of Zero Down Home Loans
- Require you to save less
- Can buy a home sooner
- Can potentially buy more house
- Less money tied up in an illiquid asset
- Put fewer dollars at risk if things go south
- Might be able to invest money elsewhere for better return
- Can eventually refinance to better terms if home prices rise
- Harder to find financing
- Mortgage payment will be higher every month with larger loan amount
- Mortgage rate will likely be higher
- You will pay mortgage insurance, even if not explicitly via higher closing costs or rate
- Could fall into an underwater position more easily
- Might be difficult to refinance if you want to change your loan terms
Read more: Primer on mortgage down payment requirements.