The high cost of making a down payment is one of the biggest obstacles for many first-time homebuyers This is where FHA loans with 0% down can help The Federal Housing Administration (FHA) offers mortgage programs that allow you to purchase a home without making a down payment,
While enticing FHA 0% down loans have specific requirements and limitations to be aware of. This comprehensive guide provides everything you need to know about qualifying for and using an FHA loan with 0% down to buy your first home.
Overview of FHA Loans
The FHA insures mortgages provided by approved lenders for buyers who may not meet conventional loan requirements. By paying an upfront and annual mortgage insurance premium, FHA borrowers can qualify with lower credit scores and smaller down payments than conventional loans.
There are several different FHA loan programs offering unique benefits. The most popular FHA offerings include:
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FHA 203(b) – This covers purchase of primary residences with just 3.5% down. It is the most widely used FHA program.
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FHA 203(k) – FHA’s rehab loan program finances purchase plus renovation costs in a single loan.
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FHA Streamline – A refinance option to lower rates/payments on an existing FHA mortgage without appraisals.
FHA 0% Down Options
The FHA has two loan programs that allow for 0% down payment on a home purchase:
1. FHA 203(b) with Gift Funds
This program allows first-time buyers to make 0% down payment if the entire down payment amount is gifted by a family member, employer, charitable organization or government agency. The gift must be documented.
2. FHA Back to Work – Extenuating Circumstances
This special FHA pilot program is for buyers in certain states who faced job loss, suffered financial hardship, and have fully recovered to qualify again. It waives the down payment and mortgage insurance, providing 0% down.
FHA 0% down loans require mortgage insurance and have loan limits. But they offer the chance at homeownership without cash savings through flexible credit and underwriting guidelines.
Qualifying for an FHA 0% Down Loan
While the FHA allows 0% down loans in certain cases, you still must meet specific eligibility criteria. Here are the key requirements to qualify:
Credit Score
- Minimum 580 credit score for 3.5% down FHA loan
- 500-579 scores may qualify with 10% down
Debt-to-Income Ratio
- DTI of 31% to 43% accepted on FHA loans
Employment History
- Stable two-year employment history required
Property Types
- Single-family homes, townhomes, duplexes and condos allowed
Homeownership Limits
- No homeownership in past three years required for FHA
Income Limits
- No income limits on FHA loans
Homebuyer Education
- Required for first-time homebuyers
Meeting these FHA requirements alongside the down payment concessions allow you to buy with as little as 0% down.
The Pros and Cons of FHA 0% Down Loans
| Pros | Cons |
|---|---|
| Requires no down payment or cash reserves | Must pay mortgage insurance premiums |
| More flexible credit guidelines than conventional loans | Loan limits restrict purchase price |
| Low fixed interest rates and monthly payments | Seller must approve FHA financing |
| Gift funds can pay downpayment and closing costs | Strict income and employment requirements |
| Allows smaller down payments even without 0% programs | Homebuyer education mandate |
| Ideal for first-time and low-income homebuyers | Not available in all areas |
While FHA 0% down loans provide a great opportunity for buyers, make sure you fully understand both the advantages to maximize and drawbacks to navigate before committing.
Step-by-Step Process for Getting Approved
Securing an FHA loan approval with no money down involves carefully completing each step:
1. Check eligibility – Confirm you meet all credit, income, and homebuying requirements for 0% FHA loans.
2. Get pre-approved – Work with an FHA lender to get a pre-approval letter verifying you qualify.
3. Identify gift funds – Coordinate with donors to secure gift letter pledging funds for downpayment.
4. Find a home – Search for FHA-approved properties and make an offer once under contract.
5. Sign final loan docs – Provide all required paperwork to underwriting to clear appraisal and finalize 0% financing.
Completing each milestone thoroughly positions you for success applying for an FHA mortgage with no down payment.
What Closing Costs Must Be Paid?
With 0% down, you may think there are no upfront costs. However, certain closing fees still apply that you must be prepared to pay:
- Origination fee – Upfront fee to the lender, capped at 1% of loan amount on FHA
- Appraisal fee – Paid for home appraisal usually $400-$600
- Credit check fee – Covers cost of credit report $50-$75
- Home inspection – Mandatory inspection paid separately
- Title search & insurance – Verify ownership and protect lender $1,000-$2,000
- Recording fees – Register loan documents with local government
- Prepaids – Homeowner’s insurance premium and property taxes
You’ll also need to pay the initial FHA mortgage insurance premium at closing, equal to 1.75% of the total loan amount.
Using Gift Funds for Your FHA Down Payment
Gift funds from approved sources can pay for both the required FHA down payment of 3.5% as well as closing costs. Here are tips for documenting FHA gift funds:
- Gift donor provides signed letter with amount and source
- Bank statements prove donor has funds available
- Receipt of wire transfer or cashier’s check from donor
- No obligation to repay gift funds
Gifts work best coming from immediate family members able to provide a sizeable amount. Savings secured via gifts means more money in your pocket each month and no added debt obligations.
alternatives to FHA 0% Down Loans
If you don’t qualify for an FHA 0% down loan, here are some alternative options that allow low down payments:
- Conventional 97 – 3% down program from Fannie Mae/Freddie Mac
- VA loan – No down payment required if you are eligible veteran
- USDA loan – No down payment on homes in designated rural areas
- Down payment assistance – State and local programs provide down payment grants if you qualify
- Lender exceptions – Some lenders allow 5% down on conventional loans with good credit
These provide potential paths to buying with less cash out of pocket if FHA doesn’t work out.
Wrapping Up
The biggest hurdle to homeownership is often coming up with enough money for a down payment. FHA loans allow qualified buyers to purchase a home with as little as 0% down. These programs provide a way to start building equity and wealth through real estate without large cash reserves or perfect credit.
While government-insured, you still need to be an informed borrower and shop different lenders for your FHA 0% down mortgage. If you understand the costs, tradeoffs and application process, you can more readily take advantage of this opportunity. Do your homework upfront and partner with loan officers experienced in guiding first-timers through FHA 0% down purchases.
How to compare lenders
When it comes to the nitty-gritty of comparing loan quotes, consider more than just the interest rate. Consider the loan’s term length, which will have a significant impact on both your monthly payments and the total repayment amount.
Additionally, pay attention to the underwriting process, as this can vary significantly between lenders and impact the overall time and complexity of securing your loan.
- Mortgage interest rates: The lower the mortgage rate, the less you’ll pay over the loan term. However, remember that zero-down loans may inherently have higher rates due to the lender’s perceived risk.
- Loan terms: 15-year, 20-year, or 30-year? The term of the loan impacts both your monthly payment and the overall cost of the loan.
- Fees and charges: Look beyond the interest rate to other costs such as origination fees, application fees, and any penalties.
- Monthly payments: Make sure you understand what your monthly commitments will be, as this will significantly affect your budget.
Apply for a closing cost assistance program
Most down payment assistance programs can be used for closing cost assistance, too. However, the grant or loan you receive likely won’t be enough to fully cover both the down payment and loan fees. Consequently, you may have to pay the remainder out of pocket.
NEW! FHA up to 100% Financing NO MONEY DOWN Program
Is it possible to purchase a home with a FHA loan with zero down?
If coming up with a down payment is a struggle, an alternative to buying a house with no money down is an FHA loan. The FHA does not offer a no-money down loan. However, they do allow for loans with a down payment as low as 3.5% of the home’s purchase price. Lenders offing a FHA loan are also restricted in the fees they are allowed to charge you.
How does a 0 down FHA loan compared to other mortgages?
Our Zero Down program pairs a standard FHA first mortgage for up to 96.5% of the total purchase price plus second mortgage options to go toward down payment and/or closing costs. The second mortgage provides down payment assistance of 3.5-5% of the purchase price as forgivable financing or repayable lien.
What are the benefits of a 0 down FHA loan?
The Zero Down program gives you the option to buy without a down payment. It removes this common roadblock for lots of first-time and repeat homebuyers. You can start the journey to homeownership without waiting to save. This program offers options to homebuyers with less than perfect credit scores and low to moderate-income.
What are the requirements for a 0 down FHA loan?
Most lenders require a minimum credit score of 580 for a no-down-payment VA loan or 640 for a zero-down USDA loan. FHA loans are also available with a FICO score of 580, though you’ll need a 3.5% down payment to qualify. If you want to use a conventional loan with just 3% down, you’ll need a credit score of 620 or higher.