4 in 10 Americans Say a Lack of a Down Payment Is Stopping Them From Owning a Home. Here’s How to Buy One With $0 Down

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No down payment? Read on to see how it may be possible to buy a home regardless. 

These days, buying a home can be pretty difficult. Not only has it gotten very expensive to sign a mortgage thanks to soaring borrowing rates, but a lack of inventory has prospective buyers struggling to find suitable properties. Throw in the fact that home values are still up, and it’s a wonder how anyone on a typical income is able to buy.

But let’s be clear — many would-be buyers are putting off plans to purchase a home. And for 39%, not having a down payment is the primary reason for not pursuing homeownership, according to a recent CNBC survey. But even if you don’t have any funds available for a home down payment, there may be an option that allows you to purchase a home.

Do you qualify for a VA loan?

VA loans are a borrowing option that current or former military members can pursue. You may also be eligible for a VA loan as the widow of a military veteran.

Most mortgage lenders require a down payment at the time of your closing. A conventional lender might accept as little as 5% down, but that’s still cash you’ll need to come up with. And if you want to avoid private mortgage insurance, a costly expense that can make homeownership more expensive, you’ll need to hand over 20% of your home’s purchase price at closing for a conventional loan.

But with a VA loan, you’re not required to make a down payment at all. And VA lenders are sometimes more relaxed than traditional lenders when it comes to borrower credit scores. So if you’ve run the numbers and have decided that you can afford to own a home despite not having funds for a down payment, a VA loan could be worth pursuing.

Know the drawbacks of a VA loan

A VA loan might seem like a good borrowing option when you don’t have money set aside for a down payment on a mortgage. But before you sign one of these loans, know the downsides.

You could end up underwater on your mortgage

First, if you don’t put any money down at closing, you may be more likely to end up underwater on your mortgage — a situation that arises when the value of your loan balance exceeds your home’s value. This is an especially large risk today given that home values are elevated.

Let’s say you put $0 down on a $300,000 home, only in a year from now, your property is only worth $260,000 because the market cools. It may be that you’ll have whittled your mortgage balance down somewhat due to having made a year of payments.

But remember, in the early days of paying off a mortgage, most of your money goes toward interest, not principal. And if you’re borrowing $300,000 for a $300,000 home that drops in value by $40,000 in 12 months’ time, chances are, you’re going to end up underwater.

When you’re underwater on a mortgage, you have fewer options for selling your home. If your property is worth $260,000 but you owe your lender $295,000 on your remaining mortgage, you’d either have to dip into your own cash reserves to come up with the $35,000 difference or ask your lender to agree to a short sale, which it may not do. A short sale will also show up on your credit report and potentially lead to a lower credit score.

You could face expensive fees

VA loans come with a funding fee you have to pay at the time of your mortgage. That could make your loan a lot more expensive.

If it’s your first time taking out a VA loan and you’re making a payment of less than 5%, the funding fee will be 2.15%. If it’s a subsequent VA loan, that fee will be 3.3% for a $0 down payment.

If you’re putting down 5% or more, your fee will be 1.5%. And if you’re putting down 10% or more, it’ll be 1.25%. This holds true whether it’s your first VA loan or not.

All told, VA loans make it possible to purchase a home with no money down. But whether that’s the best move for you is questionable. So before you apply for a VA loan, consider the pros as well as the cons.

It’s one thing to have no money to put down at closing when you buy a home. But it’s another thing to have no funds in the bank for emergency expenses. If you don’t have any cash reserves, it’s best to hold off on buying a home. Otherwise, you risk a world of debt and financial upheaval if an expensive home repair comes up, or if you lose your job and can’t pay your mortgage for a period.

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