Understanding USDA and VA 0% Down Loans

Let's talk about one of my favorite homebuyer myths, "You can't buy a house if you don't have money for a down payment." For some buyers, that's simply not true. Two federal mortgage programs can provide eligible borrowers with 0% down financing, USDA and VA, but before you start mentally spending the money you aren't putting down, there's something important we need to clear up. Zero down does NOT automatically mean zero dollars out of pocket. Let's talk about it.

USDA: 100% Financing in Eligible Areas

USDA's Single Family Housing Guaranteed Loan Program is designed to help qualifying low- and moderate-income households purchase homes that will be their primary residences in eligible areas. For qualifying borrowers and properties, USDA allows 100% financing. Translation, no down payment may be required, but there are two big eligibility buckets. The BUYER has to qualify. USDA has income and mortgage qualification requirements. The PROPERTY has to qualify. The home must be located within a USDA-eligible area and meet applicable property requirements, you need both.

"But I Don't Want to Live in the Country."

This is exactly why I want you checking eligibility instead of guessing. USDA uses its own eligibility maps and geographic criteria. A location you think is too suburban may qualify.

A location you assumed qualified may not and eligibility can change. So when a buyer tells me "I don't want a rural house." My response is, let's look at the actual map before we eliminate an entire financing option.

VA: Another Powerful 0%-Down Option

For eligible veterans, active-duty service members and certain surviving spouses, the VA home loan benefit can be one of the strongest mortgage options available. VA states that eligible borrowers may purchase with no down payment as long as the sales price isn't higher than the appraised value, subject to VA and lender requirements. VA-backed loans also do not require monthly private mortgage insurance. Borrowers generally need to obtain a Certificate of Eligibility, commonly called a COE, and satisfy both VA and lender qualification standards.

So Does 0% Down Mean I Need $0?

Not necessarily. Say it with me, down payment and cash to close are not the same thing.

Even with 100% financing, you can still encounter expenses such as:

• Earnest money

• Option fee

• Inspection

• Appraisal

• Closing costs

• Prepaid insurance

• Tax and insurance escrows

• Other transaction expenses

Some money you pay earlier in the transaction may later be credited appropriately at closing. Your lender should provide the actual cash-to-close estimate for your loan.

This Is Where Negotiation Matters

Let's say you qualify for a 0%-down mortgage but still need several thousand dollars for eligible closing costs. Now your REALTOR® needs to understand your financing strategy before writing the offer.

Depending on the transaction and applicable loan rules, we may discuss things such as:

• Seller contributions toward allowable closing costs

• Builder incentives

• Lender credits

• Available assistance programs

• Negotiating the sales price

• How each concession affects the overall transaction

This is why financing and real estate strategy shouldn't live in two separate rooms. Your lender and REALTOR® need to communicate.

New Construction + 0% Down?

Potentially.

If you're looking at new construction in an area that may qualify for USDA financing, don't automatically assume the builder's advertised financing is your only option.

Likewise, eligible VA buyers should compare available VA financing and builder incentives.

Ask:

Can I use my financing here?

What incentives do I receive if I use the builder's preferred lender?

What incentives do I lose if I don't?

What does each option do to my monthly payment?

What is my total cash to close?

Now we can compare apples to apples.

0% Down vs. Down Payment Assistance

Here's another important distinction. USDA or VA 0% down, the underlying mortgage may finance the eligible purchase without requiring a traditional down payment. Down Payment Assistance. A DPA program provides separate assistance that can help an eligible borrower satisfy down-payment and/or allowable closing-cost needs. Those are different strategies and depending on program rules, certain assistance programs may be paired with eligible mortgage products. Your lender needs to determine what's allowed for your specific loan.

If you qualify for a 0%-down loan and have money saved, that doesn't mean your savings suddenly need to disappear at HomeGoods or TJMaxx buying home decor and furniture. Homeownership comes with expenses. Things break, insurance deductibles exist and moving costs money. Sometimes preserving an emergency fund is more valuable than putting every available dollar into the transaction.

Have that conversation before closing.

I want buyers to stop asking "What's the cheapest way for me to get into a house?" and start asking, "What's the healthiest way for me to become a homeowner?" Those aren't always the same answer. Maybe 0% down gives you the breathing room you need. Maybe putting some money down makes more sense. Maybe assistance helps preserve your savings. We're going to look at the whole picture.

Mortgage eligibility and property requirements vary. Buyers should verify current USDA or VA requirements with the applicable federal agency and an approved lender. This series is provided for educational purposes and is not mortgage, legal, financial or tax advice. Mortgage programs, interest rates, assistance amounts, funding availability and eligibility requirements can change. Verify current information with the applicable agency and qualified participating lender.