How Can I Buy a House without a Deposit?

By Arlene Isenburg on March, 21 2022
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Arlene Isenburg

Whether you’re paying rent, paying off student loans, or just living your life, it is hard to save enough money to make a down payment when you have necessary living expenses every month.


Saving for a down payment is difficult for the average American. Ask any homeowner the hardest part of buying a home, and there’s a good chance they’ll say saving for the down payment.


This is especially true when saving for a 20% down payment to avoid having to pay for Private Mortgage Insurance (PMI). Luckily, lenders and government agencies understand that difficulty and offer options. Buyers don’t have to pay 20% down. In fact, it is possible to buy a home with no down payment whatsoever.


It’s important to remember that for lenders, lending money is a business. Lenders prefer borrowers who pay larger down payments, because they believe the loan is less risky and they are more likely to get their money back (and then some). Whereas there are often stricter requirements for borrowers who pay smaller down payments, because they are seen as more of a risk to not pay the loan back. So how do no-money-down homes exist when lenders have such strict requirements?


This is where the government comes in. To get a mortgage with no down payment, you will need to get a loan backed/insured by the federal government. If a borrower defaults on a government-backed loan, the government steps in and pays the lender the balance owed. Because of this “insurance policy,” these loans are less of a risk to lenders, which enables them to be less restrictive and offer loans to people who otherwise might not qualify. There are currently two programs that allow for zero down payments: VA loans and USDA loans. Both have special eligibility requirements, and both require the buyer to pay closing costs.


VA Loans

Backed by the U.S. Department of Veterans Affairs, these loans are only available to members/veterans of the military and their spouses. VA loans have no down payment requirement, are flexible with credit scores (typically over 580) and other credit-related issues (such as bankruptcies), and offer below-market interest rates. There is also no limit to the loan amount. PMI is not required, but borrowers do have to pay a guarantee fee, which can be absorbed into your loan principal (the balance of your loan) to be paid off over time instead of as a one-time payment.


USDA Loans

A USDA loan, also called a “Rural Housing Loan,” was meant to encourage home-buying in rural areas, but it is also an option for suburban buyers. These loans do not require a down payment but typically require a credit score of 640. Backed by the U.S. Department of Agriculture (USDA), interest rates are low (below-market and better than some low down payment loans), and there is no limit to the price of the home. There is a guarantee fee, but it can also be absorbed into your loan principal. There is an income limit of 115% of the local median income, and borrowers must pay PMI, but the PMI for these loans tend to have lower fees than other loans. In addition, the home must be your primary residence and a single-family home.


If you don’t qualify for one of the above loans, there are other loan programs that allow for low down payments, which have less restrictive eligibility requirements than the zero down payment options.


FHA Loans

FHA (Federal Housing Administration) loans require 3.5% down and are insured by the Federal Department of Housing and Urban Development (HUD). Since the loans are backed by the government, this loan program allows below-average credit scores (typically a score of 500 with 10% down or 580 with 3.5% down). There is no requirement regarding the source of your down payment, meaning it can be paid with down payment assistance or gift funds. But PMI is required, and the home needs to be your main residence. There is a loan maximum up to which the FHA will insure--$822,375 in high-cost areas like New York City.


The Conventional 97 Loan

Available to borrowers with a credit score of at least 620, this loan requires a 3% down payment and often costs less than an FHA loan. Backed by Freddie Mac and Fannie Mae, it allows buyers to pay for the entire down payment with gift funds. But there are some restrictions, such as the home must be a single-family dwelling, you must have a fixed-rate mortgage, and there is a loan maximum of $548,250 regardless of location.


HomeReady and Home Possible Mortgages

Designed for low-income and multi-generational families (but available to everyone who falls under the income maximum of 80% of the local median income), these loans require a 3% down payment. These conventional loan programs are offered by most traditional lenders but are backed by Fannie Mae and Freddie Mac, respectively, and may require borrowers to enroll in an educational course. Buyers using these loans get lower PMI fees, mortgage rate discounts, and below-market rates.


In addition to these options, there are down payment (DPA) assistance programs throughout the country that help low-income and first-time buyers afford their down payment. DPA programs can cover all or some of your down payment and may even help with closing costs, depending on the program. Some are in the form of loans that need to be repaid, but some are grants that do not need to be paid back as long as you meet certain requirements, like living in the home for a specific length of time.

If you don’t qualify for these programs due to bad credit, you may want to consider taking steps to improve your credit score. Raising your credit will take time and consistency, but there are easy things you can do to increase your score. They include making credit card payments on time, checking your credit report for errors, becoming an authorized user of a parent/loved one’s credit card, reducing credit card debt, staying below your spending limit, and not applying for new credit accounts.


The Bottom Line

You don't need one of the above loans to pay less than 20% down for your home. Even conventional loans allow for down payments as low as 3%, but you will need to pay for PMI. PMI is a requirement of lenders to protect themselves in the event you default on your loan, though it does go away when you recoup 20% equity in the home.


But if you do qualify for a low/no down payment loan, it would be a huge savings. Not spending a considerable amount of money on a down payment will allow you to keep your savings for an emergency fund and to pay for living expenses. Like with all financial decisions, it’s important to weigh all factors involved.


The best way to secure the right mortgage for you is to partner with an experienced Loan Officer. Your Loan Officer will walk you through the specific requirements for each loan type available to you, and can offer guidance on the best options to meet your needs. Find a Ruoff Loan Officer in your area here, and check out our home buying guides to learn more about the mortgage process.