Zero-down mortgages are not extinct!
There is so much talk these days concerning the added income, assets and higher credit score it takes to qualify for a mortgage. Perhaps one of the most misunderstood conceptions out there today suggests homebuyers will need at least 20 percent down to qualify for a mortgage.
That could not be further from the truth. The truth is, home loans are still available with no money down.
There are several ways to get a zero-down home loan. USDA Rural Housing programs, VA loans for veterans, and FHA mortgages combined with down payment assistance all achieve the zero-down objective. Here is a rundown of each program and what is required.
USDA Rural Development home loans
USDA loans are 100 percent zero-down mortgages designed to make it easier for people to buy homes in rural areas of the country. To get a USDA mortgage, your property must be eligible (primary residence in a designated rural area) and you must be eligible too (income cannot exceed 115 percent of the median household income for your area). Perhaps to your surprise, much of the U.S. is considered rural. To see if your area qualifies, you can check the property's eligibility on the USDA website. You can check your income eligibility as well.
Unlike the VA and FHA home loans, the USDA sometimes actually lends you the money to buy your home. This is called a Direct Loan. A Direct Loan comes with a term of up to 38 years and the interest rate is set by the government. For those of you with low or very low incomes, your mortgage payments could be subsidized as well.
Moderate-income borrowers can get USDA Guaranteed Loans, in which the money comes from private lenders. As with VA and FHA mortgages, you need to shop for the best mortgage rates and terms because they are not dictated by law.
VA loans for veterans and their families
VA loans require no down payment and no mortgage insurance. You can get them from VA-approved mortgage lenders, including banks, credit unions and mortgage companies. Those eligible include:
- Active duty personnel
- Reservists/National Guard members
- Some surviving spouses
The Veteran's Affairs department does not loan you money; it guarantees up to 25 percent of the purchase price for the lender that approves and funds your mortgage. There are limits to the size of this guaranty, which depends upon the location of the property. For most but not all counties, the maximum 100 percent loan is $417,000. The VA keeps a list of all county loan limits on its site.
The VA collects a funding fee (currently 2.15 percent on 100 percent loans for first-time VA borrowers) which offsets the cost of providing the guaranty. You can roll this fee into your mortgage if you choose.
It is important that you understand that because VA home loans are made by private mortgage lenders, you are not entitled to a loan just because you have a Certificate of Eligibility. Your income, credit and assets must meet underwriting guidelines. Also, the VA does not regulate mortgage rates, so you need to shop around for rates to get an idea of what you should be paying.
FHA mortgages with down payment assistance
FHA mortgages require down payments of at least 3.5 percent. However, there are many programs that provide down payment assistance to first-time homebuyers (usually defined as those who have not owned a home in at least three years).
There are also programs offering assistance to those who meet certain income restrictions and those who buy in areas that provide incentives to purchase homes. To find these programs, check out HUD's state and local home buying programs pages.
In addition, the Good Neighbor Next Door program allows those who qualify (teachers, police officers, fire fighters, and EMTs) to purchase homes in certain areas at a 50 percent discount. This can be combined with any other down payment assistance or financing you qualify for (VA, FHA, USDA, conventional). You have to purchase a HUD home (a home owned by the agency and located in a designated Revitalization area) and live in it as your primary residence for at least three years. You can search out HUD homes online.
Right now, HUD is offering several new sales incentives on HUD homes to make them more affordable for homebuyers. The incentives vary from state to state but may include the following:
- $100 down payments on HUD Homes purchased with FHA-insured financing
- Sales allowances that can be used to pay closing costs, make repairs or pay down the mortgage principal
- Broker bonuses for owner-occupant sales
Go to HUD's information page on sales incentives to see what you qualify for.
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