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Can You Buy Your Next Home With No Money Down?

By Matthew Frankel, CFP® - Updated Feb 14, 2017 at 3:57PM

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Although lending standards have relaxed, 20% down is still the norm for conventional mortgages. However, you may be able to buy your next home without a down payment.

Source: Flickr user fitzgene.

With today's low mortgage rates, owning a home is often cheaper than renting. However, the problem for most would-be buyers is coming up with a down payment.

There are some programs that will allow you to buy a home without having to come up with a lot of cash. Some are worth looking into, but some should be avoided. Here's a quick overview of three ways to become a homeowner with no money down.

A great option if you qualify
VA loans are probably the most well-known "no money down" option. Those who qualify can finance a home with no money down and no private mortgage insurance. VA loans have a "funding fee," which varies depending on your loan amount and down payment, but the ability to get a no-money-down loan without mortgage insurance still makes these loans a pretty good option.

These loans are available to active-duty military personnel and those who have served during a qualifying wartime period. You can find a detailed list of eligibility requirements here.

Easy to get, but pricey
FHA mortgages require a small down payment of at least 3.5%, but the rules allow for these funds to come from a gift. So technically, the FHA loan is one way to get into a home of your own without putting any of your own money down.

These loans are relatively easy to get for many borrowers, especially when compared with conventional mortgages. On top of the low down-payment requirement, FHA mortgages allow for credit scores as low as 600 (depending on the lender). For comparison, to get the lowest rates on a conventional mortgage, you generally need a FICO score of 740 or higher.

However, FHA loans have gotten considerably more expensive in recent years. You used to be able to get rid of the mortgage insurance after paying the loan down to a 78% loan-to-value ratio, but this is no longer the case with low-down-payment loans. Now, you'll need to pay the monthly insurance premium for at least 11 years.

Source: pallspera.com via Flickr.

For 30-year loans with the minimum down payment, the costs can really add up. In addition to an annual mortgage insurance premium equal to at least 1.3% of your loan balance (this is divided by 12 and tacked on to your monthly payment), you'll also have to pay an upfront premium at closing of 1.75% of your loan amount. So, on a $200,000 mortgage, this means an extra $3,500 will be due at closing, and your monthly payment will be $217 higher thanks to the mortgage insurance cost.

Personally, I'm not a fan of FHA loans. I thought they were a good option up until a few years ago when premiums started rising dramatically, but now they're just too expensive. If an FHA loan is your only option to buy a house, you may be better off renting and saving money toward a larger down payment.

If you want room to spread out...
One mortgage option that many people don't know about is the USDA loan, also known as a "rural housing loan," which allow for up to 100% financing. In order to qualify for these loans, two qualifications must be met: The property must be in a qualifying rural area as defined by the USDA, and the borrower's income must be below a certain level (115% of the median income for the area).

Source: Louis Roving via Wikimedia Commons.

There is a mortgage insurance requirement, but it is much more affordable than its FHA counterpart. The USDA charges a 2% upfront mortgage insurance fee, but the annual mortgage insurance premium is just 0.4% of the loan balance.

USDA mortgages are intended to encourage development of rural areas and to provide middle- and lower-income consumers an affordable path to homeownership. If your income level qualifies, and you are looking in a "rural" area, then a USDA loan may be a good option for you.

A few things to consider
Before you go ahead and buy a home with no money down, there are a few things to think about. First, because you are financing more of the purchase price, your monthly payment will be substantially higher than it would be if you put 20% down. This could increase your monthly cost to the point where renting makes more sense, so do a little research first.

Also, with no money down, it is a lot easier to become "underwater" on your mortgage if home prices drop. These things shouldn't necessarily prevent you from buying a home, but you should definitely be aware of them.

So, depending on your personal situation and where you want to live, it is indeed possible to buy a home with no money down. Is it worth it for you? That's for you to decide.

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