Coming up with the funds for a down payment poses a major challenge to many aspiring homeowners, especially younger ones. However, two types of home loans make it possible to buy a house with no money down if you meet certain criteria.
What is a zero-down mortgage?
A zero-down mortgage is a home loan that does not require any down payment. Only two zero-down mortgages exist: VA mortgages and USDA mortgages. Both are backed by a government guarantee that limits the lender’s potential losses.
It’s risky for a lender to extend a loan for 100% of a home’s purchase price without a government guarantee.
If the borrower wants to stop paying the mortgage and move out, whether because they’ve lost their job or the home has declined, there’s little stopping them. All they will lose is their credit reputation and whatever equity they’ve accumulated.
Options for a zero-down mortgage
Both zero-down home loans are restricted to certain borrowers:
- VA loans are only available to certain military service members and veterans.
- USDA loans can only be used by lower-income borrowers to buy homes in areas with a population below 35,000.
Both VA and USDA require borrowers to pay a funding fee up front to keep the government’s loan guarantee from being a burden on taxpayers.
The funding fee costs less than a down payment, but it doesn’t give you any equity. If you finance the funding fee, you will also have to pay interest on it.
Here’s how some of the basic requirements for these two types of loans compare:
Learn More: VA Loan vs. Conventional Loan: How to Choose
VA Loans
VA loans are backed by the Department of Veteran Affairs. The service requirements for a VA loan depend on when you served and whether you were called to active duty. If you’re on active duty now, you qualify after 90 continuous days of service.
VA loans don’t have a minimum credit score requirement, and if you don’t have a credit score, you may be able to get approved with nontraditional credit.
However, VA lenders may impose their own credit requirements. Veterans United, for example, requires a minimum score of 640.
VA loans:
- Don’t have a maximum debt-to-income ratio
- Can only be used for primary residences
- Don’t require mortgage insurance
Most borrowers will need to pay a VA funding fee. The fee amount depends on how much you put down and whether it’s your first time using a VA loan.
For example:
If you’re using a VA loan for the first time and putting down less than 5%, you’ll pay a funding fee of 2.3% of the loan amount. Assuming you’re borrowing $120,000 on a zero-down mortgage, then, you’ll pay a funding fee of $2,760.
Keep Reading: How Much Down Payment Do You Need to Buy a House
USDA Loans
Backed by the Department of Agriculture, USDA loans are limited to properties in eligible rural and suburban areas.
USDA loans:
- Are restricted to very low-, low-, and moderate-income households; income limits are based on location and household size
- Don’t require a minimum credit score
- Have a maximum total debt ratio of 41%
Like VA loans, USDA loans charge a funding fee that will cost you 1% of the loan’s amount up front and 0.35% of the average principal balance every year.
USDA funding fee example for a $120,000 fixed-rate mortgage at 4% for 30 years:
- Upfront fee: $1,200
- Approximate annual fee, first year: $420
- Approximate annual fee, second year: $412
- Approximate annual fee, 30th year: $22
Pros of a zero-down mortgage
A zero-down mortgage has several benefits.
- You can buy a house right away. There’s no need to spend months or years saving up for a down payment.
- You’ll have less cash locked up. Even if you can afford a down payment, you might prefer to keep that money in your emergency savings.
- You won’t pay for mortgage insurance. You’ll pay other fees, but they could be less expensive in the long run.
Cons of a zero-down mortgage
Putting nothing down on a home loan also has drawbacks, however.
- You’ll have larger monthly payments. The less you put down, the bigger your monthly payment. That said, if you’re choosing between a zero-down loan and a 3% or 5% down loan, the monthly payment difference will be minimal.
- You won’t have any equity in your home. Not having any equity puts you at greater risk for going underwater on your mortgage. If your mortgage does go underwater, you may have trouble refinancing the loan or selling the home.
- Zero-down loans aren’t without fees. You’ll pay a 2.3% funding fee on a VA loan and a 1% guarantee fee on a USDA loan. The USDA loan also has a 0.35% annual fee.
Low-down-payment loans to consider instead
Borrowers who don’t meet the requirements for a VA or USDA loan still have the option of buying a house for as little as 3% down. There are both conventional and government-backed options for low-down-payment mortgages.
Low-down-payment mortgage options and requirements:
Frequently asked questions
How many years of income do you need for a self-employed mortgage?
Most lenders require at least two years of consistent, verifiable income when applying for a mortgage as a self-employed borrower. This helps show that your income is stable and sufficient to cover mortgage payments. In some cases, lenders may accept one year of income if your self-employment history and financial situation are very strong, but this is less common.
What is proof of income for a self-employed mortgage?
To prove income for a self-employed mortgage, you’ll typically need to provide:
- Tax returns (usually two years' worth).
- Profit and loss statements.
- Bank statements to show cash flow.
- 1099 forms if you receive contract income.
Lenders may also ask for additional documentation such as business licenses or a CPA letter confirming your income and business status.
Is it hard to get a mortgage with a 1099?
Getting a mortgage with 1099 income can be more challenging than for salaried employees, but it's not impossible. Lenders generally require detailed documentation, including two years of 1099 forms, tax returns, and other proof of consistent income. Lenders may scrutinize your debt-to-income ratio more closely to ensure you can manage mortgage payments with the fluctuations typical of 1099 income.
How do I get an FHA loan if I am self-employed?
To get an FHA loan as a self-employed individual, you need to:
- Provide two years of tax returns showing stable income.
- Submit profit and loss statements and bank statements to verify cash flow.
- Ensure your credit score meets the FHA minimum (typically 580 for a 3.5% down payment, though some lenders may require a higher score).
- Your debt-to-income ratio must also fall within acceptable limits (typically 43% or lower).
Does Fannie Mae require 2 years of tax returns for self-employed?
Yes, Fannie Mae typically requires two years of personal and business tax returns for self-employed borrowers. In some cases, if you have been self-employed for more than five years, one year of tax returns may be acceptable, depending on the stability of your income and financial situation.
