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A zero-down mortgage is a type of home loan that offers 100% financing, meaning you put no money down at closing. Zero-down mortgages can make it easier for first-time or low-income borrowers to buy a home, but they could cost more in monthly payments and interest. Discover the basics of zero-down mortgages, the pros and cons, their availability and alternatives.
What Is a Zero-Down Mortgage?
Generally, a zero-down mortgage requires no down payment to purchase a home. A down payment is a percentage of the purchase price that is typically paid upfront when purchasing a home. Depending on the type of mortgage and the buyer's credit and debt-to-income ratio (DTI), the down payment required can vary.
A traditional rule of thumb was to put 20% of the purchase price into a down payment, but today's down payments are often lower. Because home prices have risen substantially in the past several years, it can be challenging for many homebuyers to come up with the typical down payment needed to qualify for the best mortgage rates and avoid private mortgage insurance (PMI).
It is possible to lock in your purchase with a smaller sum. In 2022, the median down payment on a home was only 13%, the National Association of Realtors says. But certain conventional mortgages and government-backed mortgage programs offer zero-down mortgage loans.
Pros and Cons of a Zero-Down Mortgage
Before choosing a zero-down mortgage, it's important to understand both the positives and negatives of opting to do without a down payment.
Pros of a Zero-Down Mortgage
- Avoids draining your savings: The price of a new home can be startling—and so can the down payment you need. The median price of houses sold in the U.S. in the third quarter (Q3) of 2022 was $468,000, according to the Federal Reserve. That means if you make a 20% down payment, you'd end up paying over $93,000. That can really drain your savings, or at least eat up a large chunk of your emergency fund. It also may leave little surplus money for repairs or renovations that may need to be done soon after buying.
- Purchase a home sooner: If you have exceptional credit and a stable income, your lender may be willing to work with you so you can get into a home months (or years) earlier than you might otherwise, even with little or no money down. Likewise, to free up money for a down payment, first-time or even repeat buyers might receive seller concessions—money from the seller to cover your closing costs, for example.
- Helps cover other costs: Closing costs typically range from 2% to 5% of a home's purchase price. These costs are typically collected upfront on the day your home purchase and financing are finalized. That means if you buy a home for $400,000, you might pay up to $20,000 just in closing costs. Add on the cost of your down payment and it's easy to see why a zero-down mortgage is so attractive.
Cons of a Zero-Down Mortgage
Along with the benefits of a zero-down mortgage, you'll want to also consider the drawbacks.
- Start with little equity: Buying a home is an investment that offers you the opportunity to build equity. Equity is the difference between what your home is worth and what you still owe on your mortgage. Making no down payment means you'll have no immediate equity in your home. So, if you have to sell after being in the home for only a short time, you may take a loss on the sale, especially if the value of your home declines.
- Higher monthly mortgage payment: The larger your mortgage loan, the higher your payments will likely be. That means less money left over each month to cover all of your other monthly obligations, like property taxes, utilities, gas, groceries and other debt payments.
- Must meet the requirements: Some mortgage programs, like Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loans, help you get into a house with no down payment. However, to qualify, you need to meet certain requirements, like income, property location or whether or not you or your partner served in the military.
How to Get a Zero-Down Mortgage
Buying a house with zero money down is possible. Both the VA and USDA offer loans that require $0 down.
Many banks, credit unions and finance companies offer VA loans, which typically have no or low down payment requirements. But, to be eligible for a zero down payment through the VA, the sales price of the home must be at or below the home's appraised value.
VA loans also don't require private mortgage insurance, and even if your credit needs work, it may not be an issue to qualify. To apply, you must be a veteran, a member of the National Guard, an active-duty service member or surviving spouse of a veteran and present a Certificate of Eligibility (COE) from the VA.
The USDA offers two programs with no down payment requirement—the Section 502 Direct Loan Program and the Section 502 Guaranteed Loan Program—to low- and moderate-income homebuyers who live or plan to live in an eligible rural area.
To qualify for one of these programs, you must use the home as your primary residence, your debt-to-income ratio (DTI) must be 41% or lower, you must meet income requirements for your area and demonstrate you can manage debt.
If you don't qualify for one of these government-backed loans, you may still be able to get a zero-down mortgage through some banks, although they are not as commonplace as they were a decade ago and you'll generally need to meet strict requirements.
Zero-Down Mortgage Alternatives
To qualify for a conventional mortgage, you'll likely need a 20% down payment to avoid paying PMI. If you don't qualify for a zero-down mortgage program, there are zero-down mortgage alternatives and down payment assistance programs to consider in addition to those listed above.
- Explore government assistance programs for your state through the U.S. Department of Housing and Urban Development (HUD).
- Your local or state housing authority or nonprofit may have down payment programs. Many of these programs are geared toward first-time homebuyers.
- If you're a member of a credit union, check to see if they offer zero-down mortgages.
- Some larger employers may offer down payment assistance as a way to recruit employees.
- Ask a family member or close friend to help you out.
- Use money from your savings account or devise a strategy to save for a small down payment on a home. If this is a path you choose, make sure you have a plan to reimburse your savings so you're not left hanging in an emergency.
The Bottom Line
For some homebuyers, it can be difficult to come up with enough money for a 20% down payment. If you're considering a zero-down mortgage, review your credit report and check your credit score first to evaluate your chances of qualifying for a loan with a good interest rate. Then, if necessary, take steps to get your credit in the best shape possible before applying for a mortgage loan.