Buying a Home Without a Down Payment
One of the questions buyers wonder is whether they can buy a house with no money down. The answer is YES!
A significant percentage of buyers wonder exactly how much of a down payment they need to purchase a home.
Finding the money for a down payment can be one of the biggest obstacles when buying a home. This doesn’t have to be the case. However, with no money down mortgages being a possibility.
Many years ago, it was impossible to purchase a home without a substantial down payment. That is no longer the case and has been that way for many years. Unfortunately, there are still many mortgage myths floating around that are inaccurate.
Let’s review your options for a no-down-payment home loan. By better understanding your options, you could become a homeowner quicker than you thought possible.
Zero Down Payment Mortgages
The down payment is a percentage of the purchase price and is an amount of money required by the lender to reduce their risks. If you have invested a large sum of your own money in the home, you are more likely to keep up mortgage payments to avoid foreclosure.
Saving for a down payment is something every person who has a goal of homeownership should do early. Even if you know you’ll go with a low or no down payment option; it’s prudent to have additional money in reserve.
Typically, lenders prefer buyers to have a 20 percent down payment if possible, but if no down payment loans were not a possibility, there would be far fewer people owning homes.
No down payment mortgages are only available through government-backed programs. The mortgage is still arranged through a lender, but the government guarantees the loan. If you fail to keep up with your monthly payments, the government will take the loss and not the lender involved.
You can expect all lending institutions to do thorough due diligence, including verifying your financial information through the major credit reporting agencies.
The government programs are designed to help people with lower incomes who otherwise wouldn’t be able to qualify for a loan. Two programs currently offer no money down.
The United States Department of Agriculture has a program to promote the development of housing outside urban areas. To help you move to a rural area, the USDA offers no money down mortgages with lower fees as well. It’s referred to as a USDA loan.
To qualify for this program, you must be looking to buy in a rural or suburban area. The USDA has maps of eligible zones, and only single-family homes are included in the program. Working farms don’t qualify, and it should be your primary residence.
The program has income requirements which means that you can’t have a total household income that is more than 115 percent of the median amount in the local area. They also need applicants to have a credit score of at least 640, and your debt to income ratio needs to be less than 45 percent.
If you are currently in the military, a veteran, or a member of the National Guard, you could benefit from a VA loan. You will need to have served a certain time, like six years in the National Guard, 90 consecutive days during wartime, or 181 consecutive days of active service in peacetime. It is also open to spouses of deceased veterans who died in the line of duty or a related cause.
You will need a Certificate of Eligibility when applying for a VA-backed mortgage with a lender. This will simply mean filling out a form or having a statement of service signed by your personnel or commanding officer if you are on active duty.
They also have the requirement of a credit score above 640 to qualify. You won’t be expected to pay mortgage insurance; instead, a one-off fee of 2.15 percent of the mortgage amount can be paid. Lenders may have other rules specific to them that you’ll need to follow to qualify.
Reduced Down Payments
If you fail to qualify for a zero-down payment loan, there are other options. Both the FHA and even Conventional loans now have low down payment options.
The Federal Housing Administration can let you buy a home with just 3.5 percent down. The program helps people with low to medium incomes and has even fewer requirements than VA or USDA loans. FHA mortgages have been around since 1934. The Federal Housing Administration insures the loan, so your lender can give you a better deal.
To qualify for an FHA loan, you will need a credit score of at least 580. If your credit score lands between 500 and 579, it’s possible to get an FHA loan provided you can make a 10 percent down payment. With FHA mortgages, the down payment can come from savings, a grant providing down payment assistance, or even a gift letter for your mortgage.
Keep in mind, that if you choose to put less than ten percent down, you will need to pay mortgage insurance. You do have the option to refinance later to remove this need when you are in a better financial situation. FHA mortgages are one of the better options when your credit score is not the best.
While a 20 percent down payment is the standard requirement from lenders, many will allow you to buy with less money saved. If you shop around, you might be able to find lenders offering loans with as little as 3 percent down.
If you find an acceptable loan, there will be the need to pay private mortgage insurance. This will prevent the lender from losing out if you run into financial difficulties. However, it doesn’t benefit you directly and is an expensive addition to your mortgage payments.
You may be able to cancel the private insurance when you have twenty percent or more equity in the home, check with your lender before agreeing to this type of contract.
Even if you don’t have the money saved for a down payment, government-backed programs could offer a lifeline. They provide a way for people to become homeowners even when their financial situation isn’t normally considered a good risk by lenders. However, if you want to take advantage of these programs, you still need to meet certain requirements.
Before starting your home search you should get a hold of your credit report which is actually free to do. Check for errors to make sure there is nothing that will negatively impact your credit score. Your credit score will have a direct impact on the loan terms you will receive from the lender.
Final Thoughts on Buying a Home With No Money Down
Buying a home for the first time comes with tremendous financial responsibility. You should never jump into owning a home just for the sake of doing so. It is incredibly important to make sure you’re emotionally and financially ready.
As previously mentioned, you must have funds set aside for emergencies. You should never be buying a house without having fallback funds.