How to buy a house with no down payment

For many buyers, coming up with the funds for a down payment is a challenging part of purchasing a home. That’s especially true for first-time buyers, 38% of whom said it was the most difficult step, according to a recent National Association of REALTORS® survey. 

That could be why the average down payment for first-time buyers is only 8%. But even that is too much for some borrowers. If you’re one of them, it might be possible to buy with no money down. If you are looking for a no-down-payment mortgage, a USDA or VA loan might be the best option for you.

What is a no-down-payment mortgage?

A no-down-payment mortgage is a home loan that lets you finance 100% of the home’s value. That kind of loan is unusual because it increases the risk to the lender — a borrower who doesn’t contribute any of their own cash to a home purchase might be more likely to default on their loan. That’s why most conventional loans require borrowers to put at least 5% down, and borrowers who put less than 20% down must purchase private mortgage insurance (PMI) that protects the lender if the borrower stops making payments.

Where to get a no-down-payment mortgage

The typical mortgage loan requires a down payment based on Freddie Mac and Fannie Mae underwriting standards. Loans that are eligible for purchase by Freddie Mac and Fannie Mae are called conventional loans, and they’re by far the most common type.

However, not all loans follow conventional loan standards. Some are backed by government agencies that set their own standards.

VA loans with no down payment

A VA loan is a mortgage loan issued through an approved bank, credit union, or mortgage company and guaranteed by the U.S. Department of Veterans Affairs. “Guaranteed” means that in the event a borrower defaults on their loan, the VA steps in to cover the lender’s losses.

The VA allows eligible veterans and active-duty military and their families to finance a home purchase with no money down. Borrowers can finance 100% of the home value, plus the funding fee due at closing. The VA doesn’t allow closing costs to be rolled into the loan.

USDA loans with no down payment

USDA loans are mortgage loans guaranteed by the U.S. Department of Agriculture. Also known as Rural Development loans, they can only be used to finance the purchase of a home in a location designated “rural” by the USDA.

Borrowers can finance 100% of their home purchase, plus the upfront guarantee fee due at closing, but not closing costs.

Pros and cons of buying a house with no down payment

Buying with no money down sounds great, and for many buyers it is. But you’ll have to make some compromises in return.

What income do you need for a no-down-payment mortgage?

Any lender you use will want to be confident that you can repay the mortgage, and you’ll want to make sure you’re getting a house you can afford. 

One way to estimate your maximum housing cost is to multiply your annual income by three; for example, if you earn $50,000 a year, you’d be looking for a house that costs around $150,000. 

Your actual budget might be higher or lower depending on your financial situation. Redfin estimated that the average homebuyer in 2023 would have had to pay 41.4% of their income on housing fees, but forecasted a better outlook for affordability in 2024. Take a close look at your financial situation and current debts when you determine what you can afford.

While you don’t need a specific income to qualify for a no-down-payment mortgage, lenders will want to see how your income relates to your debt. The VA and USDA look at debt-to-income ratios (DTI) to ensure borrowers can afford to repay their loan amount. 

The VA allows a DTI of 41%, meaning that borrowers’ total debt obligations, including their mortgage loan principal and interest, homeowners insurance, and property tax, plus the combined total of their other monthly debt payments, can equal up to 41% of their gross monthly income. Higher DTIs are allowed in certain circumstances.

The USDA allows a principal/interest/tax/insurance (PITI) debt ratio of 29% and a total combined DTI of 41%. Well-qualified borrowers, such as those with higher credit scores, may exceed 41% DTI. 

Alternatives: Low-down-payment mortgages

Only eligible veterans and active-duty military and their families qualify for VA loans, and USDA loans have income limits and restrictions on where the home can be located. As a result, most homebuyers won’t qualify for either. However, lenders offer options with low down payment requirements that might have low-enough upfront costs to allow you to purchase a home:

• 97% loan: First-time homebuyers can finance 97% of their home purchase with a Fannie Mae 97% loan. Some borrowers might need cash reserves to qualify, but Fannie Mae offers suggestions for applicants to gather the funds, such as through gifts from relatives or grants.
• HomeReady: Fannie Mae’s HomeReady loans let low-income buyers purchase a home with as little as 3% down. You don’t have to be a first-time buyer to qualify.
• HomeOne: First-time homebuyers can also use a HomeOne loan from Freddie Mac to purchase a home with 3% down. There are no income limits with this loan.
• HomePossible: HomePossible is Freddie Mac’s loan for low-income borrowers. As long as you live in the home, you can have a co-borrower who does not. You don’t have to be a first-time buyer to qualify.
• FHA loan: FHA loans are insured by the Federal Housing Administration. Similar to the guarantees offered by the VA and USDA for their loan programs, FHA’s insurance lets lenders make loans to borrowers who might not qualify for conventional financing. You can finance up to 96.5% of your home purchase if your credit score is 580 or higher, or finance 90% with a credit score of 500 to 579.

All of these options require the borrower to buy mortgage insurance for the lender. The conventional loans from Fannie Mae and Freddie Mac only require it until you have 20% equity in the home. With FHA loans, mortgage insurance is required for the entire life of the loan.

Tips for saving for a down payment

The more money you can put down, the better. A larger down payment reduces your risk of default and might qualify you for better interest rates, which can save you tens of thousands of dollars over the life of the loan.

The American Bankers Association offers six tips for saving for your down payment:

1. Research home prices to get an idea of how much you’ll have to spend on a home, and based on that, establish a down payment goal. Then set a timeline and calculate how much to save each month to meet it.
2. Open a separate savings account to hold your down payment savings. Look for a high-yield account with no fees.
3. Lower your bills. Shop around to see if you can find better deals on your insurance, internet, and wireless provider. Look for promotions offering special rates.
4. Keep track of your discretionary spending — money that’s not going toward necessities. 
5. Rather than thinking of your down payment savings as all or nothing, set milestones you can celebrate along the way. Treating yourself to a small reward at each point will help you stay motivated.
6. Research state, county, and municipal down payment assistance programs that provide grants or low-cost loans. Many such programs are for first-time buyers, but you could qualify if it has been three years or longer since you’ve owned a home, you’re a single parent or displaced homemaker who has only owned a home with a former spouse, or your previous property was not anchored to a permanent foundation.

No-down-payment mortgage FAQ

What type of mortgage does not require a down payment?

VA and USDA loans both allow you to purchase with no money down.

What is the easiest home loan to get?

FHA loans are usually the easiest to get. They have looser credit requirements than conventional loans and fewer restrictions than those found in VA and USDA loans.

Do you have to be a first-time homebuyer to get a no-down-payment mortgage?

No. VA borrowers can reuse their home loan benefit each time they pay off a loan. USDA loans have income and location requirements but do not require borrowers to be first-time homeowners.