So, you’re ready to buy a house . . . or at least you think you’re ready. But you don’t have enough cash on hand to make a hefty down payment.
We get it. With housing prices being what they are, it can be really hard to save up a 20% down payment for a house. You’re probably getting antsy, especially if you’re the only one in your circle of friends who isn’t a homeowner. After all, we’ve been told all our lives that owning a home is the American dream! It must be in the Constitution, right? (Fact check: It isn’t.)
So, can you buy a house with no money down? Well, there are ways . . . but it’s a bit more complicated than it sounds. And it’s definitely not the best way to go about getting into a home—not even as a last resort.
Just remember this life lesson from Jurassic Park: Just because you can do something doesn’t mean you should. (Okay, so you’re not creating dinosaurs in a lab, but no-money-down loans can have financially draining consequences that can eat at your future.)
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Let’s look at your no-money-down home-buying options—and why none of them are a good deal for you.
Can You Buy a House With No Money Down?
The short answer is yes—it’s possible to buy a home with no money down. But before you start looking at that three-bed, two-bath on Zillow, that yes comes with a big but right after it.
There are different types of no-money-down mortgages. But you have to meet very specific requirements before you can qualify for one. And each one comes with lots of extra fees.
So sure . . . technically speaking, there are no-money-down options where you can get your mortgage with little-to-no cost at the time. But they hurt you in the long run.
How Can You Buy a House With No Money Down?
The most common no-money-down mortgages are government-backed loans. These mortgages are underwritten by the United States federal government (translation: your fellow taxpayers). Since the government guarantees these loans, the bank doesn’t take on all the risk for what would otherwise be a very risky loan. (It doesn’t get much riskier than letting people buy stuff with no money.)
These kinds of loans can be best described as “good intention” loans since they were designed to help specific groups of people become homeowners. They may be nice in theory, but not so much in practice (kind of like a lot of things the government does—looking at you, student loans!).
And let’s be honest . . . do you really want the government involved in your family’s biggest investment? Here are the most common government-backed, no-money-down loans:
Members of the United States military can apply for a no-money-down mortgage through the Department of Veterans Affairs (VA). Making it easier for our veterans to buy a home sounds like a really cool thing, right?
However, VA loans have lots of strings attached and requirements to meet—the first being you have to be active duty, a veteran, or the spouse of a veteran killed in the line of duty. On top of that, you’ll have to pay a funding fee of 1.4–3.6% of your loan amount.1 So you end up paying more in the long run than you would have for the same house with a conventional loan.
The United States Department of Agriculture (USDA) offers mortgages through the Rural Housing Service (RHS). As the name of the organization suggests, these are loans meant to help people in more rural areas of the country afford a house. Isn’t that a nice thing?
Not really. The USDA loan is very restrictive, especially about where you can buy a home. These loans are designed for rural areas, so if you live in the big city, you’re most likely out of luck. There are also limits on the size of the house you can get and the maximum amount of income you can make to still qualify—again, depending on where you live.2
Mortgages from the Federal Housing Administration (FHA) are meant for first-time home buyers who may be having a hard time getting a conventional loan. This is technically not a no-money-down loan, since the minimum down payment for an FHA loan is 3.5%. But that’s still pretty great, right?
Well, FHA loans are subject to all kinds of additional fees and requirements, too—like an up-front mortgage insurance premiums (MIP) of 1.75% of your total loan, as well as an annual MIP payment of anywhere from 0.45 to 1.05% of your current loan balance.3
Should You Buy a House With No Money Down?
The short answer is no—never buy a house with no money down. That’s it. That’s the answer.
Here’s the bottom line: If you can’t afford to put any money down on a home mortgage, you’re not in a financial position to become a homeowner right now. If you can only put down a super small amount, it’s probably still not a good idea. It might be a harsh reality, but it’s true.
Think about it: There are other costs involved with homeownership (HOA fees, emergency repairs, homeowners insurance premiums, etc.) that may end up putting you in a bad spot financially. If you couldn’t cover the down payment, what makes you think you’ll be able to handle all those costs?
And again, do you really want to rely on politicians in Washington, D.C., to take care of your loan when they can’t even get their own financial house in order?
So, what’s the best way to buy a house? With cash. 100% down. Trust us, it can be done. But we get that not everyone can do that. So, if you’re going to get a mortgage, make sure you do it the right way.
That means saving up a good down payment. What does that look like? A 20% down payment is ideal since it means you won’t have to pay private mortgage insurance (PMI) as part of your monthly payment. PMI is insurance that protects the lender—not you—in case you stop making payments. Lenders require it for all home buyers who put less than 20% down.
But a 5–10% down payment will also work—especially if you’re a first-time home buyer. Just be prepared for the PMI payments. And remember, the more you put down, the less you have to borrow—and the faster you can pay that mortgage off and be completely debt-free!
No matter how much you’re putting down, go for a fixed-rate 15-year mortgage with a monthly payment that’s no more than 25% of your take-home pay (including principal, taxes, insurance, PMI and any HOA fees).
And one more thing: Never buy just because of housing market conditions or pressure from your family or friends. Only buy a home when you’re financially ready. That means you’re out of debt and have an emergency fund with three to six months of expenses saved. That way you know you’ll be able to afford the extra expenses of homeownership—and your home will end up being a blessing, not a curse.
You can make all this happen—you’ll just have to be intentional—get on a budget, get out of debt, and set long-term financial goals. Until then, it’s best to rent (and there’s nothing wrong with that!) and keep your eye on the prize. Millions of people have gotten into homes this way, and you can too!
There Are Better Options
When you’re ready to put that cash money down on a conventional mortgage and join the homeowning crowd, work with a lender who cares about you and your financial goals. We recommend our RamseyTrusted friends at Churchill Mortgage. They can help you find a mortgage you can afford and pay off quickly so you can use your money on more important things.
And then you’ll need a real estate agent to find that home that’s perfect for your family and your budget. One of our RamseyTrusted agents would love to help make your homeowning dreams come true! They’re part of our Endorsed Local Provider (ELP) program—agents in your area that we partner with to take care of your individual needs the Ramsey way.