How No Down Payment Mortgages Work and What They Actually Cost
What a no down payment mortgage is and who offers them
A no down payment mortgage lets you borrow the full purchase price of a home without putting money down upfront. Instead of saving 3, 5, or 20 percent of the home's cost before you buy, you finance 100 percent through the lender. The tradeoff is that you pay more in interest over the life of the loan, and the lender protects itself by charging you mortgage insurance—a monthly fee added to your payment that covers the lender's risk if you stop paying.
No down payment mortgages come from three main sources: the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) if you served in the military, and the U.S. Department of Agriculture (USDA) if you buy in a rural area. Some conventional lenders also offer 100 percent financing, but these are less common and usually carry higher interest rates. Each program has different rules about who qualifies, what the home must cost, and where it can be located.
Key Takeaways
- FHA loans require a credit score of at least 580 to put down 3.5 percent, or 500 to put down 10 percent; VA loans and USDA loans have no down payment requirement but have their own credit and income rules.
- Mortgage insurance on FHA loans costs between 0.55 and 1.3 percent of the loan amount per year and is added to your monthly payment; VA loans have a one-time funding fee instead.
- Your total monthly payment includes principal, interest, property taxes, homeowners insurance, and mortgage insurance—the last of which you cannot remove until you have paid down the loan or refinanced.
- No down payment mortgages mean you start with negative equity: if you sell or the home value drops, you may owe more than the home is worth.
- Interest rates on no down payment loans are typically higher than rates on loans where you put money down, because the lender's risk is greater.
How FHA loans work when you have no down payment
An FHA loan is the most common no down payment option for people who are not military veterans or buying in rural areas. The FHA does not lend the money itself—a bank or mortgage company does—but the FHA insures the loan, which means it promises to cover the lender's loss if you default. Because of this insurance, lenders are willing to lend to people with lower credit scores and smaller down payments.
To get an FHA loan with no down payment, you need a credit score of at least 500. If your score is 580 or higher, you can put down as little as 3.5 percent instead of zero, which lowers your monthly mortgage insurance cost. You also need a steady income, a debt-to-income ratio below 50 percent (meaning your total monthly debt payments should not exceed half your gross monthly income), and a signed purchase agreement for the home.
The home itself must meet FHA standards: it cannot have major structural problems, the roof cannot be near the end of its life, and the electrical and plumbing systems must be safe. An FHA appraiser inspects the home before you close, and if it fails, the seller must fix the problems or you can walk away. This protects you from buying a home that is falling apart, but it also means some older or rural homes will not may have access to.
VA and USDA loans: true zero down payment options
VA loans are available to military veterans, active-duty service members, National Guard members, and surviving spouses of service members who died in service or from service-related injuries. A VA loan requires no down payment and no mortgage insurance. Instead, you pay a one-time funding fee of 1.4 to 3.6 percent of the loan amount, depending on whether you have served before and how much you put down. This fee is usually rolled into the loan, so you do not pay it upfront.
VA loans have no credit score requirement set by the VA itself, though individual lenders may require a score of 620 or higher. You do need a Certificate of may be able to access from the VA, which you can order online through the VA website or ask your lender to request on your behalf. The home must be your primary residence, and it must be in the United States or a U.S. territory.
USDA loans are for people buying in rural areas designated by the USDA. Like VA loans, they require no down payment and no mortgage insurance. Instead, you pay a may provide fee of 2 percent of the loan amount upfront and a 0.35 percent annual fee added to your monthly payment. You must have a credit score of at least 580, a debt-to-income ratio below 43 percent, and a household income at or below the limit for your county (which varies widely). The home must be in an may be able to access rural area, which you can check on the USDA website.
What mortgage insurance costs and how long you pay it
On an FHA loan, mortgage insurance has two parts: an upfront premium and a monthly premium. The upfront premium is 1.75 percent of the loan amount and is almost always rolled into the loan, so you finance it. The monthly premium ranges from 0.55 to 1.3 percent of the loan amount per year, depending on your credit score, how much you put down, and the length of the loan. On a $300,000 FHA loan, the monthly mortgage insurance might be $150 to $325 per month.
You pay FHA mortgage insurance for the life of the loan if you put down less than 10 percent. If you put down 10 percent or more, you pay it for 11 years. You cannot remove it by refinancing into a conventional loan unless you refinance into a new loan where you have at least 20 percent equity—meaning the home is worth at least 25 percent more than you owe. This can take years, especially if home values in your area are flat or falling.
VA loans have no mortgage insurance, which is one of their biggest advantages. Instead, you pay the funding fee once. USDA loans have no upfront mortgage insurance but charge an annual may provide fee of 0.35 percent, which is lower than FHA insurance but still adds to your monthly payment. Unlike FHA insurance, USDA may provide fees can sometimes be removed if you refinance and have enough equity.
How your credit score and debt affect your chances
Lenders use your credit score to decide whether to approve you and what interest rate to offer. On an FHA loan, a score of 580 to 619 usually qualifies you, but you may pay a higher interest rate than someone with a score of 680 or above. A score below 580 disqualifies you from putting down 3.5 percent, but some lenders will approve you for a 10 percent down FHA loan if your score is between 500 and 579.
Your debt-to-income ratio is the total of all your monthly debt payments divided by your gross monthly income. This includes car loans, student loans, credit cards, child support, and the new mortgage payment. On an FHA loan, most lenders want this ratio to be below 43 percent, though some will go up to 50 percent if your credit score is strong or you have savings. On a USDA loan, the limit is usually 43 percent. VA loans have no official limit, but lenders typically want to see a ratio below 41 percent.
If your debt-to-income ratio is too high, you have two options: pay down existing debt before you apply, or look for a less expensive home. Paying down a car loan or credit card by even a few hundred dollars per month can lower your ratio enough to may have access to. Some people also increase their income by adding a co-borrower—a spouse or family member whose income counts toward the application.
The real cost of borrowing 100 percent of the home price
When you put no money down, you borrow the entire purchase price. On a $300,000 home with an FHA loan at 7 percent interest over 30 years, your principal and interest payment alone is about $1,995 per month. Add property taxes (which vary by location but average 0.8 to 1.2 percent of the home value per year), homeowners insurance (typically $1,000 to $2,000 per year), and mortgage insurance (roughly $150 to $325 per month on this loan), and your total payment could be $2,600 to $2,800 per month.
Over 30 years, you will pay roughly $720,000 in principal and interest alone on that $300,000 loan. Add mortgage insurance, property taxes, and insurance, and the total cost of the home is closer to $1 million. If you had put down 20 percent ($60,000), your principal and interest payment would be about $1,596 per month, and you would pay no mortgage insurance. Over 30 years, that saves you roughly $400 per month, or $144,000 total.
The advantage of a no down payment loan is that you do not have to save $60,000 before you buy. The disadvantage is that you pay significantly more over time. Whether it makes sense depends on whether you can afford the higher monthly payment, whether you expect your income to rise, and whether you believe home values in your area will increase.
What happens if you sell or the home value drops
When you borrow 100 percent of the home price, you start with zero equity. If the home is worth $300,000 and you owe $300,000, you own nothing yet—the lender owns it all. If home values drop to $280,000 and you need to sell, you will owe $300,000 but the home will sell for $280,000. You will have to pay the $20,000 difference out of pocket, or the sale will not close.
This situation is called being underwater or having negative equity. It happened to millions of homeowners during the 2008 housing crisis, when home values fell sharply. If you lose your job and cannot pay the mortgage, you cannot simply walk away—you still owe the full amount. If you want to refinance to a lower interest rate, you cannot do it unless the home is worth more than you owe.
To protect yourself, buy a home you can afford to keep for at least five to seven years, in an area where home values have been stable or rising. Avoid stretching your budget to the maximum just because a lender will approve you. If you lose income or face a major expense, you need a cushion of savings to fall back on.
Frequently Asked Questions
Can I get a no down payment mortgage with bad credit?
FHA loans accept credit scores as low as 500, but you will need to put down 10 percent instead of 3.5 percent, and you will pay a higher interest rate. If your score is below 500, you will need to wait and rebuild your credit before most lenders will approve you. Checking your credit report for errors and disputing them can sometimes raise your score by 20 to 50 points.
What is the difference between a VA loan and an FHA loan?
VA loans have no down payment, no mortgage insurance, and no credit score requirement from the VA. FHA loans require a minimum credit score of 500 and charge mortgage insurance for the life of the loan. VA loans are only for military veterans and their families; FHA loans are for anyone. VA loans typically have lower interest rates because they are backed by the government and carry less risk for lenders.
Can I remove mortgage insurance from my FHA loan?
If you put down 10 percent or more, you can remove mortgage insurance after 11 years of on-time payments. If you put down less than 10 percent, you pay it for the life of the loan unless you refinance into a conventional loan with at least 20 percent equity. Refinancing usually takes several years of home value appreciation or extra payments toward principal.
What if I cannot afford the monthly payment after I buy?
Contact your lender immediately—do not wait until you miss a payment. Many lenders offer loan modification programs that can lower your payment by extending the loan term or reducing the interest rate. The FHA also has a partial claim program that can pay part of your arrears if you have fallen behind. Waiting until you are in default makes these options harder to access.
Do I need a co-signer for a no down payment mortgage?
Most lenders do not require a co-signer for FHA, VA, or USDA loans if you meet the income and credit requirements on your own. However, adding a co-borrower (usually a spouse or family member) can help if your debt-to-income ratio is too high or your credit score is borderline. The co-borrower's income and debts both count toward the application.