What to Know About Mortgages With No Down Payment

Pros, Cons, and What You Could Actually Pay

A future homeowner weighs his mortgage options.
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Down payments are often one of the biggest challenges for potential homebuyers. Fortunately, not having a hefty down payment doesn’t have to preclude you from getting out of the rent race, buying a home, and building your long-term wealth. There are quite a few mortgage options that require no down payment at all. Learn if a no-down-payment mortgage might be right for you.

What Is a Mortgage With No Down Payment?

If you qualify for a mortgage with no down payment, you won’t have to produce a down payment on closing day. Down payments for conventional mortgages tend to start at 3% of the purchase price. Not making a down payment could save you at least $11,000 upfront on the average 2020 home for sale in the U.S.

Be careful, though: A no-down-payment mortgage doesn’t mean you won’t have any upfront costs. Unless you qualify for some sort of assistance program, you will likely still owe closing costs, which usually run 2% to 5% of the home’s price.

Here’s a look at how the costs of a $200,000 home can change based on your down payment. For comparison’s sake, all three are based on 30-year terms at a 3.75% interest rate, without property tax or mortgage insurance:

  No-Down-Payment Loan FHA Loan Conventional Loan
Down Payment $0 $7,000 (3.5%) $40,000 (20%)
Monthly Payment $926 $893 $740
Total Interest Paid $133,513.35 $129,019.88 $107.053.89
Total Payments Over Time $333,513.35 $322,019.88 $267,053.89

Types of Mortgages With No Down Payment

VA Loans

These mortgage loans are offered by the Department of Veterans Affairs and are only available to eligible: 

  • Active-duty servicemembers
  • Veterans
  • Surviving spouse of a veteran 
  • Some members of the Reserves and National Guard 

Credit score requirements vary by lender on VA loans, and you can borrow up to four times your basic home loan entitlement. They also come with a funding fee, which ranges from 1.4% to 3.6% of the loan amount.

USDA Loans

The U.S. Department of Agriculture offers home loans to buyers in rural parts of the country. To qualify, you’ll have to fall under a certain income threshold, and you must be purchasing a house in an eligible location, too. USDA income limits for your area can be found at USDA.gov.

For example, most of the communities in Houston proper and major suburbs are ineligible. Properties located on the outskirts of town, in surrounding cities like Cleveland and Willis, Texas, though, are eligible. Use this tool to determine property eligibility for a specific home you’re considering.

Like VA loans, credit score requirements vary by lenders on these mortgages. USDA loan limits depend on your county, and you’ll need to pay an upfront and annual guarantee fee (up to 3.5% at closing and 0.5% per year). These take the place of traditional mortgage insurance.

Though these are the only mortgage loans that ask for no down payment, there are down payment assistance programs that can help if you’re unable to come up with a down payment on your own. The availability of these programs varies by state and municipality, so check with your local housing agency for options in your area.

Pros and Cons of Mortgages With No Down Payments

Not having to produce a down payment can be helpful, especially if you’re lacking savings. But it doesn’t come without drawbacks.

For one, a lower down payment means a higher loan balance—as well as a higher monthly payment.

Your down payment amount will also determine whether you need mortgage insurance or not (another added cost) and could influence what mortgage interest rate you qualify for.

Pros
  • You can likely buy a home sooner

  • Your upfront costs of homebuying will be lower

Cons
  • You’ll pay more in interest

  • You may have a higher interest rate

  • You may have a larger monthly payment

  • You may need to pay for mortgage insurance

  • They’re not available to everyone (or everywhere)

Is a Mortgage With No Down Payment Worth the Cost?

No-down-payment mortgages will typically cost you more in the long run than making a decent down payment would, but they still might be a smart move for some buyers.

To determine if a no-down-payment mortgage is right in your case, have a good handle on your budget, and use a mortgage calculator to understand how much the loan will cost you monthly, annually, and over the life of the loan. Compare that to a similar loan with a down payment and see the difference.

You can also speak to a loan officer about your options. They can give you a loan estimate for both a no-down-payment mortgage (if you qualify) and one with a down payment. This can give you an idea of how both the short-term and long-term costs of each will shake out.

The Bottom Line

  • No-down-payment mortgages can make it easier to buy a home, but they will usually cost you more in the long run.
  • Veterans, military members, and rural homebuyers are most likely to enjoy the benefits of a no-down-payment mortgage.
  • Some states and municipalities offer down payment assistance programs that can help cover the costs of your down payment.
  • Offering a down payment will usually qualify you for better terms and result in a lower-cost loan over time.

Article Sources

  1. Consumer Financial Protection Bureau. "How to Decide How Much to Spend on Your Down Payment." Accessed May 28, 2020.

  2. Federal Reserve Bank of St. Louis. "Quarterly New One-Family Home Sales by Price and Financing." Accessed May 28, 2020.

  3. Freddie Mac. "Understanding the Costs." Accessed May 28, 2020.

  4. U.S. Department of Veteran Affairs. "VA Funding Fee and Loan Closing Costs." Accessed May 28, 2020.

  5. FDIC. "Single Family Housing Guaranteed Loan Program." Page 3. Accessed May 28, 2020.