First off, no down payment mortgage programs are relatively uncommon and no or even low down payments that do not require you to pay private mortgage insurance (PMI) are even harder to find. The government-backed USDA and VA mortgage programs require no down payment but most conventional low down payment programs except for the NACA Home Loan Program require a 3% down payment.
For many programs, you can use a gift, employer homebuyer assistance program, down payment assistance program or qualified subordinated second loan to pay for all or part of the down payment -- which enables you to buy a home with little or no financial contribution -- but the down payment needs to come from somewhere even if you personally do not provide the funds.
If a lender is offering you a no down payment mortgage, I recommend that you confirm with the lender that the loan program truly requires no down payment and that you are not benefiting from a grant or subordinated second mortgage. As the borrower it is important to know if you are receiving a grant or loan to pay for your down payment as these programs may have terms or conditions you need to follow.
After you confirm the required down payment, if any, your next step should be to clarify if the mortgage program requires you to pay private mortgage insurance (PMI). For government-backed programs, the FHA and USDA mortgage programs require you to pay upfront and ongoing mortgage insurance while the VA mortgage program requires you to pay an upfront VA funding fee but no monthly fees.
The majority of conventional low down payment programs require you to pay a monthly PMI fee. The programs that do not require PMI that we are aware of include the Bank of America Affordable Loan Solution, the Citi HomeRun Mortgage Program and the NACA Home Loan Program. All of these programs could be interesting options for you to consider if you do not want to pay PMI.
Review our Comparison of Low Down Payment Mortgage Programs
The NACA Program is unique because it is one of the only programs that does not require a down payment, closing costs or PMI, but the qualification process is different than other mortgage programs. Plus you are required to fulfill an ongoing community advocacy requirement after your loan closes. We provide a comprehensive review of the NACA Home Loan Program and you can also learn more by visiting the NACA website.
Returning to our discussion of PMI, another point we should highlight is that sometimes lenders charge you a higher mortgage rate instead of charging you a separate monthly PMI fee. This is called lender paid PMI. Because you are not paying a separate monthly PMI fee, lenders may tell you that you are not paying PMI, but in reality, the PMI is included in the higher interest rate you pay. For example, if the current market mortgage rate is 4.125%, the lender may charge you 5.250% and pay the PMI directly.
When you pay for PMI separately (called borrower paid PMI), you can request to have the PMI removed when your loan-to-value (LTV) ratio falls below 78% to 80%, either because your property value increased or you paid down your loan balance. In contrast, lender paid PMI is non-cancellable which means you are required to pay the higher mortgage rate for your entire loan. This can cost you thousands more in interest expense over the life of your mortgage unless you refinance.
Review What is PMI and When Am I Required to Pay It?
If you find a no or low down payment program that does not require you to pay PMI monthly, I recommend that you ask your lender if your mortgage rate includes PMI (even if the lender says you are not paying PMI). If the answer is yes, ask the lender what your mortgage rate and monthly payment would be if you paid PMI separately. Although paying a separate monthly PMI fee is an extra cost, this approach usually saves you money in the long run by reducing your interest expense.
Your final step in selecting a low down payment mortgage is to compare programs. We recommend that you compare mortgage rates, closing costs and monthly payments, including PMI fees, to determine the loan program that is right for you.
The down payment required by the program is another consideration. If you have sufficient funds for at least a 3% down payment the number of mortgage programs available to you increases significantly and you can concentrate on finding the best mortgage terms and lowest monthly payment, including mortgage insurance. If you are set on not making a down payment and do not want to use a down payment assistance program, your best options are the VA, USDA and NACA mortgage programs.
The table below outlines mortgage rates, closing fees and payments for leading lenders in your area. We recommend that you contact multiple lenders to understand the low down payment programs they offer and to compare their proposals. Shopping for your mortgage is the best way to find the loan program that is right for you.
You can also use the FREEandCLEAR Lender Directory to search for 25 mortgage programs including multiple low down payment options. Our lender directory features over 3,800 lenders and enables you to search by loan program, location, lender type and rating.
NACA Home Loan Program: https://www.naca.com/purchase/steps-to-homeownership/
Private Mortgage Insurance: https://www.fanniemae.com/content/guide/selling/b7/1/02.html