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How to Buy a Home with Little or No Money Down

How to Buy a Home with Little or No Money Down

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience
For many people, saving money for a down payment is one of the biggest obstacles to buying a home. Lenders typically require that borrowers make a down payment of at least 20% of a property’s purchase price for the borrower to receive the lowest mortgage rate and avoid paying extra fees. So if you want to buy a home for $250,000, that means you would need to make a $50,000 down payment and also have enough money to pay for closing costs and keep sufficient savings in reserve. Saving that much money can be challenging for budget-strapped borrowers.

Although putting 20% down to purchase a home is standard, there are many mortgage programs that enable borrowers to purchase a home a much lower down payment or even no down payment at all. Below we outline how to buy a home with little or no down payment and summarize the relevant mortgage programs available to borrowers. It is important to highlight that many of these programs require the borrower to pay extra fees or a higher mortgage rate and most have limits on loan amount or borrower income.  So using a no or low down payment program may come at a cost to borrowers or the eligibility requirements may be more restrictive. Understanding the benefits and disadvantages of the resources available to borrowers enables you to find the mortgage that is right for you and buy a home with little or no money down.
1

Conventional Mortgage Programs

In short, a conventional mortgage program is a program that is not insured by the government in the event the borrower defaults on the mortgage. These programs require the borrower to pay private mortgage insurance (PMI), which is an ongoing monthly cost in addition to your mortgage payment. These programs also have limits on the size of mortgage you can obtain and borrowers may also be subject to income limits and other qualification requirements.  Conventional programs typically apply to owner-occupied, principal residences.  We outline multiple low down payment conventional mortgage programs below:

3% Down Payment / 97% LTV Program: Enables borrowers to buy a home with a down payment as low as 3% and no personal borrower contribution

HomeReady Program: Enables borrowers to buy a home with a down payment as low as 3% and no personal borrower contribution. The program allows lenders to include or consider income from non-occupant borrowers, non-borrower household members and boarders, aiding your ability to qualify for a mortgage

Home Possible Program: Enables borrowers to buy a home with a down payment as low as 3% and no personal borrower contribution. The program allows lenders to include rental income from the property you purchase and occupy (for example an extra room in a single family residence or extra unit in a multi-unit residence), aiding your ability to qualify for a mortgage

Home One Program: Enables you to buy a home with a down payment as low as 3.0% with no minimum borrower financial contribution.  The program does not apply borrower income limits or property location restrictions

Conventional low down payment mortgage programs are offered through any approved lender such as a bank, mortgage broker or credit union. Contact the lenders listed in the table below to understand the mortgage programs they offer.

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In addition to the programs outlined above, many larger regional and national banks offer their own low down payment mortgage programs.  Most of these programs enable you to buy a home with a down payment between 3% and 5% and some do no require you to pay PMI.  Examples of these low down payment programs include the Bank of America Affordable Loan Solution, the Chase DreaMaker Program, the Citibank HomeRun Program and the Wells Fargo yourFirst Mortgage Program.  Each program has different eligibility guidelines as well as positives and negatives.

Review Best No or Low Down Payment Programs to understand the qualification requirements for these programs

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Government-Backed Mortgage Programs

A government-backed mortgage is insured by the government in the event the borrower defaults on the mortgage which means these programs typically have lower interest rates than conventional programs.  Each program applies different qualification requirements including borrower credit score, debt-to-income ratio, down payment, borrower income limit, mortgage insurance and loan limits.  We outline the four main low or no down payment government-backed mortgage programs below and you can click on the titles to review comprehensive guides for each program. 

FHA Mortgage Program: Enables borrowers to buy a home with a down payment as low as 3.5% and no personal borrower contribution

VA Mortgage Program: Enables active and retired military personnel to purchase a property with no down payment

USDA Mortgage Program: Enables borrowers to buy homes located in rural areas or small communities with no down payment. 95% of the land in the U.S. representing a population of over 100 million people is considered USDA rural area

HUD Section 184 Program: The program enables eligible Native American borrowers to buy a home with a low down payment (2.25% for loans above $50,000) and minimal borrower financial contribution.  The program offers low mortgage rates and more flexible borrower qualification guidelines

Use the FREEandCLEAR Lender Directory to find lenders that offer the FHA, VA, USDA and Section 184 loan programs

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NACA Mortgage Program

NACA, the Neighborhood Assistance Corporation of America, offers mortgage programs designed to make home ownership more attainable. The NACA Mortgage Program enables borrowers to purchase a home with no down payment and no closing costs.  The NACA Mortgage Program does NOT require the borrower to pay private mortgage insurance (PMI).  Borrowers must complete a mortgage counseling class and are required to volunteer at five housing advocacy events per year. The program uses a character-based borrower credit evaluation instead of requiring a minimum credit score.  The program applies loan limits and is only available in certain states.  Additionally, NACA can only be used to purchase owner-occupied, principal residences.

Review our comprehensive NACA Mortgage Program Guide

4

Down Payment Assistance Programs

Down payment assistance programs provide borrowers with a silent second mortgage, also know as a Community Second, Affordable Second or subordinate loan, to assist them with their down payment or closing costs.  In addition to obtaining a first mortgage, the borrower obtains a smaller, second mortgage to help pay for the down payment.  A borrower can combine a first mortgage, such as an FHA or HomeReady mortgage, with a down payment assistance program, allowing the borrower to purchase a home with no personal financial contribution. 

Review How a Down Payment Assistance Program Works

There are many variations of down payment assistance programs depending on the state or county you live in but the programs generally work the same way: the down payment assistance is structured as a subordinate loan or "silent second."  Down payment assistance loans are called "silent seconds" because the payments on this type of loan are deferred, which means you do not have to make a payment on the second mortgage until your home is sold, refinanced or paid in full. Silent seconds typically have a low interest rate or 0% in some cases.  Down payment assistance programs are offered through state and local housing agencies and participating lenders.

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State and Local Housing Agencies

Although most no or low down payment mortgage programs are offered by lenders, contacting your state or local housing agency can be a good starting point.  These housing agencies are familiar with the various low / no down payment mortgage programs available in your area as well as the lenders that offer them and can help you determine your eligibility for these programs.  Housing agencies also coordinate with participating lenders to assist you in applying for and closing your mortgage.

You can find housing agencies in your area by clicking HOUSING AGENCIES and selecting your state

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Family Gift

You can use a gift from a relative, fiance or domestic partner to pay for all or part of the down payment when buying a home.  There are certain rules and procedures that lenders require borrowers to follow when using a gift to pay for your down payment.  The individual providing the gift is usually required to provide a gift letter to demonstrate proof of the gift, confirm that funds being provided are not borrowed and also verify that the borrower is not required to repay the gift.  If you are considering using a gift for all or part of your down payment be sure to consult with your lender to understand its policies.

7

Piggyback / Second Mortgage

Borrowers may be able to use a second mortgage to reduce their down payment when buying a home.  A second mortgage, also known as a second trust deed or a piggyback mortgage, is a second mortgage on a property.  The second mortgage is subordinate, or junior, to the first mortgage on the property which means that in the event of a default or foreclosure, the holder of the first mortgage is paid off first before the holder of the second mortgage.  For example, a borrower may obtain a first mortgage for 80% of the property purchase price and a second mortgage for 10% of the property purchase price which means that the borrower is only required to make a 10% down payment.

Review How to Use a Second Mortgage to Buy a Home

Lender qualification guidelines for a second mortgage are similar to the qualification guidelines for a first mortgage and focus on a borrower’s debt-to-income ratios.  Check with the lender you are planning on using for your first mortgage to determine if they offer second mortgages. If your first mortgage lender does not offer second mortgages, you may be able to obtain one through a different lender.

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Alternative Lenders and Programs

Some alternative lenders such as credit unions may offer their own low or no down payment mortgage programs.  Although these programs are relatively rare, you can contact credit unions in your area to understand if they offer any special, proprietary low or no down payment mortgage programs.

Sources

Homebuyer Assistance Programs: https://www.fdic.gov/consumers/assistance/protection/mortgages/looking/homebuyer-assistance-program.html

HUD Homebuyer Programs: https://www.hud.gov/topics/buying_a_home

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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