Zero-Down Mortgages for Today’s Young Buyers

Introduction to zero-down mortgages

Today, many people under 40 find saving for a home down payment challenging. Burdened by student debt, high living costs, and soaring rents, they face significant financial barriers. For them, zero-down mortgages can be a crucial stepping stone toward homeownership.

Only two types of mortgages currently offer a no down payment option:

1. VA loans — Backed by the Department of Veterans Affairs (VA), these are almost exclusively for service members, veterans and some surviving spouses
2. USDA loans — Backed by the U.S. Department of Agriculture (USDA), these are open to anyone with a low or moderate income who wishes to live in a rural area or some smaller cities and suburbs

With these, younger people can confidently pursue their dream of homeownership and secure a place of their own.

In this article (Skip to...)

• USDA loans
• VA loans
• Applying
• The bottom line

>Related: How to buy a house with $0 down: First-time home buyer

Overview of zero-down mortgages

You still get USDA and VA loans from private lenders, although the USDA does originate some of its own each year for those with very low incomes. Generally, the government’s role is only to partially insure the mortgages.

So, in the event of a loan default, the taxpayer will help the lender to make up some of its losses. That extra cushion allows lenders to lend to people who might not otherwise qualify, on terms that would normally be too risky.

Let’s look at each.

USDA loans

Don’t think that USDA loans are available only to those who want to live in the middle of nowhere or who are employed in agriculture. Neither of those is true.

Eligibility

Indeed, the eligible areas for USDA loans, “contain over 89 million persons – nearly 32% of the population – and make up 98% of the U.S. land mass,” according to the Housing Assistance Council.

Did you get that? Homes on 98% of all the land in America, including many suburbs, are eligible for USDA loans. You’ll need to want to live somewhere truly urban to be excluded.

The loans’ income requirements may be more of an issue. You mustn’t earn more than 115% of the median income where you wish to buy a home.

How can you know whether the place you want to buy is designated as eligible for loans by the USDA? There’s a map and address lookup tool on the USDA’s website.

And how can you tell whether your income falls within its limits? Again, there’s a lookup tool on the same site.

Besides location and income, you’ll have to prove that you have decent credit (often a 640+ score), a steady source of income, and an existing debt burden that won’t stop you from comfortably affording your USDA loan.

Benefits

Obviously, the fact that it’s a zero-down mortgage is the biggest benefit of a USDA loan. But there are others.

These tend to come with competitive mortgage rates. And their mortgage insurance premiums (MIPs) are charged at a lower rate than on most other loans. So, overall, USDA loans can often be more affordable than other types of mortgages.

VA loans

It’s a truism in the mortgage industry: If you’re eligible for a VA loan, you need a very good reason to choose another sort of loan.

These really are as good as you get. And that applies across all types of loans, not just zero-down mortgages.

Eligibility

To get a VA loan, you must be one of the following:

• An active-duty service member
• A qualified veteran (but not if you were dishonorably discharged)
• A surviving spouse who hasn’t remarried and whose husband or wife was killed in the line of duty

For service members and veterans, there are minimum service thresholds. You must have served:

• 181 days of active duty during peacetime
• 90 days of active duty during wartime
• Six years in the Reserves or National Guard

You’ll know for sure that you’ve qualified only when you receive a certificate of eligibility (COE) from the VA. You can apply online on the VA’s website or ask your lender to get one for you.

Benefits

Again, the fact that VA loans are zero-down mortgages is what might first catch your eye. But there’s plenty more to like.

These loans:

• Often provide the lowest mortgage rates available
• Charge no mortgage insurance
• Have lower qualifying requirements than many other loans

VA loans are frequently the most affordable of all mortgages and among the easiest to get.

Why zero-down mortgages are attractive to younger buyers

In April 2024, a study by JPMorganChase found: “Soaring home prices are making homeownership significantly less affordable for American consumers, especially young and first-time homebuyers, with nearly 39 percent of Gen Z hopefuls citing saving for a down payment as their greatest obstacle.”

But it’s not all bad news. A January 2024 report from Redfin found that adult Gen Zers are becoming homeowners at a younger age than some previous generations. It said, “The rate for 24-year-old Gen Zers is 27.8%, compared with 24.5% for millennials when they were 24 and 23.5% of Gen Xers when they were 24.”

Nevertheless, the homeownership rate for baby boomers was 78.8% in 2022. So, younger generations still have a way to go.

Today’s young homeowners may have benefited from factors such as supportive family structures or financial education that are not available to all their peers.

That may be why Vice President Kamala Harris unveiled proposals to ease the path to homeownership as part of her presidential campaign. In August 2024, she suggested $25,000 in downpayment support for first-time homebuyers.

As of this writing, the 2024 presidential race is highly competitive, and the outcome of Ms. Harris’s campaign or the potential enactment of her proposal remains uncertain.

But, in the meantime, zero-down mortgages could boost homeownership levels for millennials and Gen Zers.

Applying for a zero-down mortgage

Applying for a mortgage is the same whether you want a zero-down loan or any other. Expect a pile of paperwork.

But, before you finalize your application, there are things you can do to boost your chances of getting approved and being offered a lower mortgage rate. These include:

1. Do all you can to raise your credit score
2. Get your card balances as low as possible, preferably below 10% of your credit limits
3. Don’t open new credit accounts or close old ones within three months or so of making an application
4. Try to avoid changing jobs during the run-up to an application unless you’re getting a promotion with the same employer or moving within your industry with a related job title
5. Save so you can comfortably afford your down payment (if any) and closing costs
6. Comparison shop for your mortgage, asking multiple lenders for quotes and then comparing them

Many miss that last point, but the range of quotes can be very wide. Financial regulator the Consumer Financial Protection Bureau says, “Mortgage data shows that borrowers could save $100 a month (or more) by choosing cheaper lenders.”

Alternative financing options

Don’t despair if you’re not eligible for a USDA or VA loan. Other loans may have smaller minimum down payments than you’d think.

A conventional loan that conforms with Fannie Mae and Freddie Mac’s rules can be yours with 3% down, providing your credit score is 620 or better. If that’s an issue, FHA loans are available to those with 580 or higher scores. And their minimum down payment is 3.5%.

Zero-down mortgages: The bottom line

Not everyone is eligible for zero-down mortgages. But, for those who are, they can be valuable shortcuts to homeownership for every renter, especially millennials and Gen Zers.

Of course, it’s disappointing if you’re not one of the lucky ones. But other types of mortgages provide low-down-payment alternatives starting at just 3% of the home’s purchase price. So, stay positive and get saving.

Whatever your position, now could be a good time to talk to a reputable mortgage advisor. They’ll advise you on the type of mortgage that will suit you best. And they can help you set realistic savings goals based on your household budget.