When does a no-down-payment mortgage make sense? Experts weigh in

Between rising home prices and today's high mortgage rates, buying a home has gotten very expensive. "Today's home affordability is the worst we've seen since the early '80s," says Neil Christiansen, branch manager and certified mortgage advisor at Churchill Mortgage.

Meanwhile, inflation and high interest rates have made it difficult for many prospective buyers to save up for a down payment. If you were putting down 20% on the average US home, you'd need nearly $88,000, according to Redfin data.

However, you don't always need to put down 20% on a home purchase. You might not even need to pay any money upfront. While not as widespread as traditional mortgages, no-down-payment mortgages do exist and could be helpful for some prospective buyers. However, these types of mortgage loans may not make sense in every situation.

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When does a no-down-payment mortgage make sense? Experts weigh in

Those who are eligible for a no-down-payment mortgage and can afford the monthly payments might benefit from not having to set aside so much money upfront.

"A no-down payment mortgage can be a great option for qualified borrowers who may not have the means to save for a down payment but have a stable income. This path could make sense when a homebuyer has limited liquidity but can comfortably afford the monthly payments and other homeownership costs, such as insurance, property taxes, and maintenance," says Chris Birk, vice president of mortgage insight at Veterans United Home Loans. 

A no-down-payment mortgage can also make sense if you want more money to invest aside from putting money into real estate.

"Although there are a few loan programs offering zero down payment, in today's high interest rate and elevated-price environment, it can be a challenge for buyers to get approved," says Christiansen. 

But if you can qualify for one, Christiansen says, then you could potentially grow your net worth by investing the money that would have gone toward the down payment into stocks, bonds or other assets.

One option for a no-down-payment mortgage could be a Department of Veteran's Affairs (VA) loan.

"For many veterans and service members, VA loans offer a secure path to homeownership with no down payment required. About three-quarters of VA buyers bought a home last year without making a down payment," says Birk.

"Another route is the USDA loan, which is available in eligible rural and suburban areas and offers a no-down payment mortgage option," he adds.

It's also possible to find a private mortgage lender offering a no-down-payment mortgage, though that could involve structures like a government-backed, low-down-payment mortgage paired with another loan to cover the remaining down payment amount.

Regardless of the source, if you're comfortable with the mortgage terms, having no down payment could help some buyers. For example, it can be a smart choice if you have a stable income, good credit and a low debt-to-income ratio, experts say. 

That's because, in today's tight housing market, you may not have the opportunity to save for a down payment, as buying sooner rather than later can be advantageous. However, you'll typically need a solid borrower profile and a good credit history to obtain a no-down-payment mortgage.

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When does a no-down-payment mortgage not make sense?

Despite the upside of no-down-payment mortgages, there are some possible disadvantages to weigh first.

"The no-down-payment talk seems to have run rampant on the internet. This is not a new product, and it's not widely available," says Kevin Leibowitz, founder, mortgage broker at Grayton Mortgage, Inc. And the terms of these loans can be a bit much, he adds.

For example, you might end up with higher monthly payments compared to a regular mortgage, aside from just the difference in the loan amount. That's because no-down-payment mortgages often come with higher interest rates and require private mortgage insurance (PMI), both of which can lead to higher monthly payments. 

And, having no equity in your home can be risky. If the property values decrease in your area, you could end up upside down on your home. Owing more than your property's worth could cause issues like making it difficult for you to move or refinance your mortgage. So, you might not want to take on the risk.

"It may not be the best choice if the homebuyer's financial situation is unstable, or if they are not prepared for the long-term financial commitment of owning a home. Would-be homebuyers who are struggling with high debt levels or inconsistent income may find that the added financial responsibility of a mortgage without an equity cushion is too much to handle," says Birk.

"Additionally, in some competitive markets, sellers might prefer offers with a down payment, as they see them as more financially secure," he adds.

Other low-down-payment mortgage options to consider

No-down-payment mortgages have their appeal, but there are other ways to buy a home without a big down payment.

"Both conventional and FHA loans offer low down payment loans, anywhere from 3% for first-time buyers with a conventional loan and 3.5% on FHA for first-time and existing buyers. To use conventional financing and be an existing buyer, a 5% down payment loan is available," says Christiansen. 

Some of these loans still have relatively narrow eligibility requirements, but they can still be more widespread than no-down-payment options.

"Lenders may offer conventional mortgage products with 3% down payments through programs like Fannie Mae's HomeReady and Freddie Mac's Home Possible, which are designed to help low- to moderate-income buyers," says Birk.

You also might qualify for programs that help you afford your down payment in the first place. For example, down payment assistance programs can provide grants for your down payment. And, that can help new or lower-income buyers get into their first homes.

The bottom line 

No-down-payment mortgages can be helpful for some buyers, such as those with plenty of income and solid credit but who lack the savings for a down payment. However, these mortgages can also increase costs and come with higher risk. As such, other options like low-down-payment mortgages or down payment assistance programs could be worth exploring.