Having the required cash for a down payment is the biggest hurdle for first-time home buyers. Ideally, homebuyers would make a large down payment to increase owner equity and decrease monthly mortgage payments. Unfortunately, for many would-be homeowners, that is simply not an option.
Is it possible to buy a house with no money?
Buying a house with no money down is possible. Sometimes it is called a zero down mortgage. You may think that buying a house that requires no down payment is impossible, although it isn’t impossible. It is hard. Here is how you can buy a house with no down payment.
How can I buy a house with no money out of pocket?
Many people would love to buy a home. But no matter how they crunch the numbers, they just don’t have the cash required. What if there is a legit way for you to buy a home without beefing up your savings? It is possible to buy a home with little or no money out of your pocket.
It may sound too good to be true. Doesn’t it? But if you do your homework, it is completely possible.
When buying a house, there are major expenses homebuyers can expect:
- Down payment – The average downpayment on a house or condo in the United States is about 12 percent. Many people put down a lot more, and some make a small down payment. Some loans, such as Federal Housing Administration (FHA) loans only require a 3.5 percent down payment as long as your credit score is 580 or higher.
- Earnest money – The earnest money ranges between 1 and 2 percent of the purchase price of the property. Homebuyers in hot markets like California and New York often make much greater earnest money deposits.
- Closing costs – As a homebuyer, you can expect to pay about two to five percent of the home price in closing fees.
How do you buy a house with no credit and no money?
If you have no credit or bad credit, you might still be able to buy a home.
You have the following option to buy a house with no credit:
- Find a cosigner – A cosigner essential takes responsibility for your mortgage in case you default. Parents frequently cosign to help their children qualify for a mortgage.
- Buy a home through an alternative program such as Habitat for Humanity. If you have really low income and don’t qualify for conventional financing, and don’t already own a home, you might qualify for a Habitat home.
- Apply for an FHA mortgage
- Work with a credit union to get a home loan.
- VA loan – Former or current military personnel may qualify for a VA mortgage. There is no credit score requirement with VA loans.
- NACA program – This program serves low-income people with either bad credit or no credit.
What is a no down payment mortgage?
For many first-time homebuyers, the down payment is the biggest hurdle when financing a home. Without a doubt, the down payment is a sizable out-of-pocket expense. Unfortunately, many people believe that the minimum down payment for a house if 20 percent. On a $300,000 house, 20 percent down is equal to $60,000 out of pocket. The good news is that a 20 percent down payment is rarely required. In fact, you may be able to get a home loan and pay 0 percent upfront, including:
- VA loans
- USDA home loans
- Using a gift for the down payment
- Down payment assistance programs
VA Home Loans
First of all, to buy a house with zero down payment, you must be approved for such a loan. Veterans with sufficient income, a Certificate of Eligibility from the VA, and a good credit score might qualify. The US Department of Veteran Affairs offers home loan programs to help veterans buy, build, or improve a home or refinance a home.
If you get a VA loan, keep in mind that the homebuyer is still responsible for paying the closing costs. Besides, the homebuyer is required to pay the “funding fee.” The funding fee is designed to protect the lender in case the buyer defaults on the mortgage. The amount of the funding fee depends on several factors, such as the amount of down payment, military service, VA loan history.
USDA Home Loans
Another option for a zero down payment loan is a USDA loan. The United States Department of Agriculture offers loans with low-interest rates. USDA loans are designed to assist low- or moderate-income people with good enough credit to buy a home in a rural area. If you have a credit score of over 640 and a debt-to-income ratio below 41 percent, you might qualify for automatic underwriting. The homebuyer is expected to pay a “funding fee.” The funding fee equals 1 percent of the total loan amount. There is also a USDA fee of 0.35 percent that is calculated as a percentage each year. It is tacked on to your monthly payments.
How to use a gift for the down payment of your house?
Whether it’s money your parents have tucked away for when you are ready to buy your first house or wedding card envelopes stuffed with bills, receiving cash gifts toward a house down payment can simplify the home financing process.
If you go this route, you will need the gift-giver to write a gift letter. The most important part of the gift letter is a statement that you are not required to pay back the money. The mortgage company requires the gift letter as proof that the money you are using for the down payment is a gift and not a loan you have to pay back.
Make sure the gift letter includes the following:
- The donor’s name, phone number, and mailing address
- A statement from the donor that repayment is not expected from you.
- The date the gift was transferred into your bank account.
- The donor’s relationship to the borrower
- The exact dollar amount (It’s not enough to say the donor is giving money as a gift.)
- The address of the property the gift is given.
- The donor’s signature
The lender may also require additional proof that the funds were in the donor’s bank account. Bank transfer documents are usually sufficient for this purpose.
Down payment assistance programs to buy a home.
Down payment assistance (DPA) is a legit option for cash-strapped homebuyers. Nationwide there are over 2,000 down payment assistance programs. Most of these assistance programs are set up by city, county, and state governments. You can search online to learn about DPA programs available in your area.
Keep in mind that DPA programs are usually created for first-time homebuyers. They are mean to assist low to moderate-income buyers trying to buy a primary residence. Generally, the DPA is used combined with an approved home loan program, generally working with an approved lender.
Homebuyers can choose from four different types of down payment assistance programs:
- Loans (second mortgages) that are forgiven over a set number of years
- Loans (second mortgages) that have to be paid down
- Loans (second mortgages) with deferred payments
FHA Home Loans
If neither of the above loan options is available to you, consider a low down payment mortgage. FHA loans are low down payment and low-interest rate mortgages. The low-interest-rate helps to keep your monthly mortgage payments low. They only require a down payment of 3.5 percent of the home’s purchase price.
FHA loans are great for people who are struggling to come up with a down payment. A bonus feature of FHA mortgages is that they can be paired with down payment assistance programs. Another option to cover closing costs and the down payment is to use gifted money.
Getting an FHA loan is a viable option for people with low credit scores (as low as 500). People with a recent bankruptcy or foreclosure can still qualify for an FHA loan. Even though home buyers need to have a steady income, there are no minimum or maximum income limits.
The biggest disadvantage of an FHA mortgage is the upfront mortgage insurance premium, which is 1.75 percent of your loan amount. If you are borrowing $350,000, for instance, your upfront MIP will be ($350,000 x 1.75% = $6125). The 1.75 percent mortgage insurance premium applies to most FHA home loans, regardless of the term or loan amount, except:
- Hawaiian home lands
- Indian lands
- Streamline refinances and some simple refinances
Are there any disadvantages to a zero down payment mortgage?
The greatest disadvantage of a no down payment home loan is that you will have no equity built up in your house when you buy your home. Also, since the lack of equity, it will take you longer to pay off your mortgage.
What is PMI?
Keep in mind that a no money down mortgage might require that you pay for PMI. What is PMI? PMI is private mortgage insurance. Lenders require a PMI when homebuyers make a down payment that is less than 20 percent of the appraised value of the home. The PMI normally costs approximately between 0.5 percent and 1 percent of the total loan amount.
Taking advantage of any of the above options to buy a home with no money certainly have their advantages. There are several factors to consider before you sign on the dotted line. Don’t make a decision lightly. Contact at least three mortgage professionals and weigh your options.