This blog post answers a question Tina in New Jersey, who asked: “What are the best types of home loans for first-time buyers with no down payment?”
The first thing to understand is that first-time home buyers with no down payment money do, in fact, have some options.
For example, most of the mortgage programs available today allow for down payment gifts from third parties. This means the upfront investment doesn’t necessarily have to come out of your pocket. So it’s possible for a first-time home buyer with no down payment to qualify for a mortgage loan – even if it requires an investment.
Best Loans for First-Time Buyers With No Down Payment
The “best” kind of home loan is the one that helps you achieve your financing goals, while delivering affordable monthly payments at the same time. So the best financing method will partly depend on what you’re trying to accomplish.
For many first-time buyers, the primary objective is to reduce their upfront, out-of-pocket expense. So let’s talk about some of the ways you might do that. Here are some of the ways a home buyer could use a mortgage loan with no down payment.
- Conventional loan with down payment gift. These days, both FHA and conventional mortgage loans allow for down payment gifts from third parties. This is when someone else, such as parents or family members, contribute money to help you meet your required down payment investment. Depending on your situation, this might be the best type of loan for you. When speaking to lenders, ask about down payment gifts.
- Credit union loan with 100% financing. These days, a lot of credit unions offer mortgage loans to their members with 100% financing. This means that a first-time home buyer could purchase a house with no down payment. There are far too many programs to list here. My advice is to do a search for credit unions in your area that offer 100% mortgage loans. You can also visit mycreditunion.gov to find a credit union you might be eligible to join.
- VA loans: the Department of Veterans Affairs offers a home loan program to military members and veterans that allows them to buy a home with no down payment. If you are eligible for this program, it is arguably the best loan for a first-time buyer with no down payment. You could qualify for 100% financing while avoiding mortgage insurance at the same time. As a Navy veteran, I have used a VA loan in the past and would do so again without hesitation.
- USDA 100% financing: The USDA rural home loan program is another option for first-time home buyers trying to avoid a down payment. But this program is limited to borrowers in rural areas who meet specific income guidelines. You can find a list of eligibility requirements on the USDA website.
- FHA 3.5% down with gift money. This is an article about the best home loans for first-time home buyers who have no down payment money saved up. So technically, an FHA loan does not meet that definition. FHA requires a minimum investment of 3.5% from all borrowers who use the program to buy a house. But, as we’ve discussed, you can also use a down payment gift from a third party when using an FHA loan. So here we have a relatively low down payment mortgage program that also allows funds to be contributed from someone else. This alone makes the FHA program worth mentioning.
So those are some of the best loan options for first time home buyers with no down payment. As you can see, there are some options out there for people in this situation. There’s also some flexibility built into the mortgage programs that do require downpayment, including gifts from family members and other approved donors.
Make Sure You Can Afford Your Monthly Payments
Not having a down payment is one thing. Actually, it’s a fairly common scenario among first-time buyers who haven’t sold a home in the past. And there are financing options available for people in this situation. The most important thing is that you choose a loan that is affordable for you, and that you are able to manage your monthly payments.
Despite legislative reforms that have occurred since the last housing crisis, it’s still possible to take on a home loan that stretches your budget to the max. And that’s not the kind of situation you want to be in.
We strongly encourage first-time home buyers to get a basic housing budget on paper, before talking to lenders about down payments or mortgage rates. It doesn’t have to be anything fancy – just a basic debt and income analysis.
Take a look at the amount of money you earn each month after taxes, and then subtract all of your recurring expenses to find out how much you have left over for your housing costs. And don’t forget your emergency fund. Financial experts recommend keeping 5 to 6 months worth of living expenses in the bank, in the event of emergency.
Disclaimer: This article covers some of the best home loan options for first-time buyers with no down payment saved up. This article is not all-inclusive, because there are far too many mortgage programs out there to list here. In addition to the options listed above, there may be grants or special programs available in your area. So we encourage you to conduct extensive research in your city, county and state to see what programs are available.