Here's What Happens When You Have $0 for a Home Down Payment

To take out a conventional mortgage loan, you generally need to make some sort of down payment. Usually, the minimum down payment conventional mortgage lenders will accept is 3%, and some lenders might ask for more, depending on the circumstances at hand. And if you don't put 20% down on a conventional mortgage, you'll have to pay private mortgage insurance.

But what if you don't have any money to put down on a mortgage? You might think that buying a home is off the table. But actually, there are certain mortgage programs that allow you to purchase a home with no money down. Whether that's a good idea, however, is a different story.

Mortgages that allow for a $0 down payment

Certain mortgage types allow you to buy a home with no money down. First, there are VA loans that give you this option, but you should know that they come with other costs, like an upfront funding fee. 

And also, as the name implies, VA loans are geared toward members of the military or military veterans and their spouses. So if you never served in the U.S. military and aren't or weren't married to someone who did, then this isn't an option for you. 

There are also USDA loans you can look at if you don't have any money for a down payment. But like VA loans, these loans have requirements you'll need to meet. You generally need to be a low-income buyer, and you need to be buying a home in a designated rural area. You'll also generally need a credit score of 640 or higher to qualify for a USDA loan. 

Should you buy a home with a $0 down payment?

The idea of being able to purchase a home with no money down at closing might seem appealing. But remember, when you make a $0 down payment, it means you start off with no equity in your home. And that could become problematic if you wind up needing to sell your home shortly after purchasing it.

Home equity is defined as the value of your home minus your mortgage balance. If you buy a home for $300,000 and take out a $300,000 mortgage to finance it, you have $0 in equity. On the other hand, someone making a 10% down payment on that home would have $30,000 worth of equity. 

A lack of equity can become an issue if you need to sell your home for less than what you paid for it. Say you have to sell after two years, but by then, you've only paid off $10,000 of your mortgage and your home's value has dropped to $280,000. You would owe $290,000 on a home that can only sell for $280,000. Starting off with more equity could help you avoid that problem.

But if you know your finances are such that you're able to keep up with ongoing mortgage payments, and you plan to stay in your home for a good number of years, then a VA or USDA loan could be a good option for you, provided you can qualify for one of these loans. And if not, then you may want to put off homeownership for a bit and save up a down payment. Even if you can't qualify for a conventional loan once you've saved some money, you can always look into an FHA loan, which could mean putting down as little as 3.5% at closing.