How To Buy A House With No Money Down
Zero-downhome loans immediately come to mind when someone is trying to buy a home without facing a significant upfront cost. However, you’ll also find options such as down payment assistance, gift funds or negotiating with the lender and/or seller to cover some or all of the closing costs.
Next, we’ll delve a bit deeper into some steps you can take to potentially save money when purchasing a home.
Look For Mortgage Loans With No Money Down
When looking for zero-down mortgage options, you’re likely to find that those backed by the government are the most straightforward options available. Some lenders with access to private funding may offer to finance your home without requiring a down payment, but most shy away from 100% financing options due to the risky nature of the investment.
If you do happen to find a private lender that doesn’t require a down payment, chances are that your interest rate will be higher and you’ll also need excellent credit history. That said, some no down payment options are more attractive to the borrower than other zero-down home loans – but you first must qualify.
Consider Down Payment Assistance
If you’re a first-time home buyer and don’t qualify for a zero down payment option, you might consider seeing what down payment assistance options may be available to you. Down payment assistance (DPA) comes in the form of grants, loans and other programs reserved for first-time home buyers. Keep in mind that, in real estate, being a first-time home buyer simply means you haven’t owned property in the past 3 years.
Let’s quickly break down some of the DPAs that may be available to you:
● Grants: Grants are essentially just gifted money and are considered the most valuable form of down payment assistance.
● Forgivable loans: Forgivable loans are a second loan that you won’t have to pay back as long as you stay in your home for an agreed-upon number of years. With an interest rate of 0% and usually enough funds to cover a whole down payment, this is a DPA worth investigating if you’re planning on staying somewhere long-term.
● Deferred-payment loans: This second loan also comes with 0% interest and is usually large enough to cover your down payment. You won’t have to repay a deferred-payment loan until you move, sell, refinance or pay off your first loan – which usually happens with money made from selling your home.
● Matched savings programs: Matched savings programs are run by banks, government agencies or community organizations and are another way that homeowners can receive help making a down payment. As the name suggests, any funds you put into an account with the program will be matched to help cover a down payment.
Check with your lender to see what forms of down payment assistance they accept.
Use Gift Money
Down payment gift money is exactly what it sounds like: A sum of money that’s been gifted to you from a friend, family member or donor with the intent of going toward the down payment on your home. During the underwriting process, your mortgage lender will look at any gifted money you may have so they can get a better sense of your assets and gauge your riskiness as a borrower.
You can receive gifted money through:
● Cash down payment gifts: Cash down payment gifts are simply when you receive cash from the gift giver to use toward your down payment. It’s important with cash gifts that the donor documents the transfer of funds by preparing a gift letter to serve as tangible proof that a transaction has taken place, while also verifying that gifted funds aren’t peer-to-peer loans intended to be paid back at a later date.
● Gifts of equity: Gifts of equity are when you’re sold a property below the sale price – usually by a family member – and these gifts, too, will require a gift letter. The difference between the listed price of the property and the price you paid is considered an amount of equity you can use toward your down payment and closing costs.
Keep this in mind: Requirements on where gifts can come from will differ from lender to lender and may depend on the type of loan you’re looking to qualify for. For example, some lenders allow gifts that come from family members only, and some allow gifts from close friends.
Ask Your Lender To Cover Closing Costs
One option you have is to ask your lender to cover some or all of your closing costs. This can be structured in a couple of ways depending on the type of loan you’re getting and which costs are being covered.
You may be able to add certain costs to the loan balance rather than paying them at closing. This is often the case with upfront mortgage insurance premiums and loan funding fees.
The other scenario involves taking a lender credit toward closing costs. Here, a lender covers all or a portion of your closing costs in exchange for you taking a slightly higher interest rate.
No matter how the deal is structured, you’ll pay more in interest over time, but you could avoid a large upfront down payment at closing and save on closing costs.
Ask The Seller To Pay Closing Costs
You may also be able to negotiate the purchase price of a home or get the seller to cover closing costs, reducing the amount you have to bring to the closing table. This may only be possible, though, in a buyer’s market where the number of sellers far exceeds the number of home buyers, which can make sellers more flexible during negotiations and give you more control.
No Down Payment Mortgage Options
Let’s go for a deeper dive into some of the common financing options available for purchasing without a down payment.
VA Loans
A VA loan is a loan guaranteed by the U.S. Department of Veterans Affairs (VA). VA loans don’t require a down payment from qualified home buyers, though most buyers will have to pay a one-time VA funding fee that replaces standard mortgage insurance and covers the cost of funding the VA loan program.
If you don’t make a down payment, the VA funding fee is 2.15% of your loan’s value, and rises to 3.3% with each subsequent use of a zero-down VA loan. If you make a down payment, your VA funding fee may be lower. Additionally, certain individuals are exempt from the VA funding fee. They are:
● Veterans receiving VA disability benefits
● Qualifying surviving spouses who receive Dependency and Indemnity Compensation
● Purple Heart recipients currently on active duty
If you do have to pay the funding fee, this and other closing costs can often be built into the loan. Although choosing this option will likely mean a higher loan amount, you’ll be able to save money on the front end.
If you’re an active-duty service member, veteran, member of the Army Reserve or National Guard, or the spouse of a deceased veteran, you may qualify for a VA loan. If applying for the loan with our friends at Rocket MortgageⓇ, you’ll need a minimum median credit score of 580. Per VA guidelines for VA loan eligibility, you’ll also need to meet one of these:
● Completed 90 consecutive days of active service during wartime
● Completed 181 consecutive days of active service during peacetime
● Served over 6 years in the National Guard or Army Reserve, or served at least 90 days under Title 32 orders, with 30 of those days being consecutive
If discharged before meeting service time requirements, the discharge must be due to a service-connected disability.
If you’re the spouse of a deceased veteran who passed away while serving or as a result of a service-related disability, you may qualify as a surviving spouse.
It’s not uncommon for VA loan borrowers to need proof of reserve funds or additional money that they won’t be using for upfront costs. Reserve funds basically show that you’ll still have enough money to begin making your payments after closing on your loan. Although it can vary based on your situation, 2 months’ worth of mortgage payments is typically a good starting point.
You should also consider the kind of property you have in mind for your future home, as that can affect your borrowing options. While a VA loan can be used on condos, the complex must be on a VA-approved list.
USDA Loans
A USDA loan is a loan backed by the U.S. Department of Agriculture (USDA) and is meant to encourage growth and development in designated rural areas. USDA loans can provide low- to moderate-income home buyers with the opportunity to buy a home with a no down payment mortgage, and although these require an upfront and annual “guarantee fee,” (with the latter divided into monthly payments), this fee is typically lower than fees associated with other mortgage options.
If you’re wondering whether a USDA mortgage is right for you, let’s first figure out if you’re eligible. Here’s a list of requirements you’ll need to satisfy for a no-money-down USDA loan:
● Your total debt-to-income ratio may not exceed 41%.
● Your monthly payment debt-to-income ratio (DTI) may not exceed 29%.
● The total gross income of your household can’t exceed 115% of the median income in the county where you’re looking to buy.
● Many lenders require a credit score of at least 640.
● You must buy a home that will serve as your primary residence in a USDA-approved rural area.
“Rural areas” doesn’t exclusively mean fields and dirt roads – in fact, many suburban areas may qualify – but if your dream home is in the heart of a bustling metropolitan area, a USDA loan may not be right for you. Examine the USDA’s map of eligible areas to see if your desired location is USDA-approved.
It can also be important to note that while a USDA loan is government-backed, you generally won’t actually get your loan through the USDA. The exception to this is the direct loan the USDA offers for low- or very-low-income borrowers. Otherwise, you’ll still need to find a good lender to work with and receive your loan that way.
Rocket Mortgage doesn’t currently offer USDA loans.
State Programs
Each state housing authority has its own lending options, including some that include down payment assistance. A good starting point for finding your state’s housing authority is a local buying directory maintained by the Department of Housing and Urban Development (HUD).
It's important to note that participation in many of these programs requires working with an approved lender.
