One of the biggest barriers to homeownership is not having enough cash to put down on a house at closing. While you might think you won’t be able to buy a home if your savings account is looking a bit lean, there are some creative ways you can make it work. From specific loan programs to family gifts and more, the odds are good that you’ll find a way to make your homeownership dream a reality.
Considerations while mortgage hunting
If you're planning on buying but trying to limit how much you pay out of pocket, keep these six things in mind while you're house and mortgage hunting:
1. See if you qualify for a VA loan
Active duty service-members, veterans and their family members are eligible for a VA loan, which is backed by the Department of Veterans Affairs. This allows qualifying buyers to purchase a home with no down payment and little-to-no closing costs.
Unlike other loan programs that may require a down payment, the VA loan program doesn't have a minimum down payment requirement.
The VA Guarantee Fee replaces the requirement for mortgage insurance, so this is an all around great way to purchase a home for those who qualify.
2. Consider an FHA loan
The FHA loan is a popular option that allows buyers to put as little as 3.5% down on a new home, which can be given in the form of a financial gift from family or from a qualified non-profit or government agency. Sellers can also contribute closing costs up to 6% of the sales price of the home.
The great thing about FHA loans is there are lower down payment requirements and less restrictive qualifying criteria, making this a great option for all potential home-buyers. But just be aware that you’ll be required to pay a mortgage insurance premium with this loan program, regardless of your down payment.
3. Opt for a Homebuyer Assistance Program
If this is your first time buying a home, there are so many resources available to help you navigate these unfamiliar waters. Fortunately, there are also some programs available at both the local and national level that offer financial assistance to new homebuyers – and in some cases, to previous homeowners as well. It could be worth looking into local programs, state programs, Non-profits, etc.
4. Don’t Overlook the USDA Loan
Another option available to borrowers who qualify, with a zero down payment requirement, is the USDA loan program, otherwise known as a rural development loan. Some eligible areas are surprisingly quite suburban – so don’t discount this loan program until you’ve checked to see if the property qualifies. It’s important to note that USDA loans do require mortgage insurance and the loan limits and income restrictions vary by area.
5. Receive a Down Payment Gift
If you’re fortunate enough to have a family member gift you money, it potentially can be used for your down payment – so long as you carefully follow the requirements set forth by your lender. You’ll need to have a paper trail showing who gifted you the money, how they gave it to you and when it was given, and that no repayment is required.
The amount that can be gifted will depend on the type of loan you choose, so it’s important to discuss your options with your lender.
6. Have the Seller Pay Closing Costs
Having your closing costs paid by the seller depends on a number of factors, including the current real estate market in your area. In a buyer’s market, where the supply of homes exceeds demand, it may not be unreasonable to ask a seller to pay some or all closing costs.
However, in a seller’s market, where the demand for homes exceeds the supply, the likelihood of a seller contributing toward your closing costs may be slim. It’s certainly worth inquiring, since many sellers want to move quickly and find it worthwhile to negotiate in order to ensure the sale closes in a timely manner.
Don’t Forget These Consideration
Using one of the methods above can certainly make buying a home more affordable if you don’t have a lot of cash on hand, but it does come with its drawbacks, which we’ll highlight below.
Depending on the type of mortgage you select, you may be required to pay mortgage insurance, which can impact the amount of your monthly mortgage payment.
Putting less of your own money down means you have less ‘skin in the game’ and you could potentially face a higher interest rate or monthly payment since lenders are taking a bigger risk.
A minimal down payment also means it will take you longer to build some equity in your home, and it may require you to live there longer than the standard five years in order to sell for a profit – though this is only a concern if you think you’ll need to move in a few years.
There are definitely factors to consider before buying a house with little-to-no cash down. However, if you’re in a situation where it would require you to empty your savings account in order to put a full 20% down on a home, it’s probably best to go with a lower down payment option and retain some cash for unexpected expenses. In any event, be sure to speak with a mortgage lender to discuss your home loan options and have all of your questions answered before making a decision.
