Is it Possible to Buy a House with No Money Down
Buying a new home, especially if you are a first-time homebuyer, can be overwhelming. Many first-time homebuyers struggle with the thought of saving for a down payment. If you are looking for a home priced at $250,000, a traditional 20% down payment would mean having $50,000 saved and available, and many first-time buyers can be frustrated with these numbers. However, the idea of a 20% down payment is somewhat outdated. A lower down payment – or even no money down – mortgages are available.
Buying a New Home with No Down Payment
Buying a home with no down payment and a mortgage for 100% (and in some cases, even higher to include closing costs or eligible home repairs) is possible. However, some of the programs available have specific qualifications.
A VA loan is only available to military members and spouses (including surviving spouses of a military member who has died in the line of duty), as well as to home buyers who have spent six years in the Reserves or National Guard. A VA loan requires no money down, flexible credit score minimums, below market rates, and no mortgage insurance.
The goal of the USDA loan is to help low-to-moderate income homebuyers. It can also be referred to as a “Rural Housing Loan”, but it is available to buyers in the suburbs as well. There is no down payment requirement and rates are competitive with other mortgages. However, income limits are enforced and you need to be near or below the median income for your area. Mortgage insurance will likely be required.
Buying a New Home with a Low Down Payment
Buying a home with a low down payment – around 3% – has several more options for home buyers who may not meet the requirements for a 0% down payment.
Conventional 97 Mortgage
The conventional 97 mortgage only requires 3% down and can be less expensive than other low down payment mortgages. However, there is a loan size cap, so buyers in high-cost markets may have trouble.
The HomeReady mortgage offers below market rates, reduced mortgage insurance costs, and requires only 3% down. In addition, it will consider the income of everyone living in the home. For example, if adult children are living with their parents, their parents’ income can help qualify.
The FHA doesn’t actually issue this mortgage, but they will insure these mortgages. Your down payment can be as low as 3.5% and can come entirely from a gift or a down payment assistance program. An FHA loan is good for buyers with less than perfect credit and can help homeowners who have past financial struggles. You will likely need to pay mortgage insurance with this loan.
Buying a New Home with a Piggyback Loan
A piggyback loan is also referred to as an 80/10/10 loan. In this home, buyers will make a 10% down payment. However, instead of getting one mortgage for 90% of the purchase price, the mortgage is split. The 80% is a traditional mortgage, and the remaining 10% is a second mortgage, usually a home equity loan. The “piggyback” name comes from the idea that the second mortgage is piggybacking on the first. The advantage to this loan is that you can make a 10% down payment, yet avoid PMI.
Many homeowners are wary of private mortgage insurance (PMI) when buying a new home. PMI is required when the mortgage is over 80% of the purchase price. The purpose of PMI is to protect the lender, but because the insurance payment is the responsibility of the buyer, many homeowners will try to avoid it. However, when homeowners look into PMI, they may find that it is not as bad as they think. PMI allows homeowners to make a very small down payment, and as mortgage payments are made, PMI will eventually be removed, often in as little as 4 to 5 years. A few years of a small insurance payment is well worth it over putting off a house purchase until you have saved 20% for a down payment.
Advantages to Avoiding the Traditional Down Payment
It is because of PMI that most homeowners consider the traditional down payment needs to be a full 20%. This often means that first time homebuyers will try and wait until they have a large amount of savings, and then completely deplete it. While this does avoid PMI and will make the monthly mortgage payments smaller, with all your money tied up in your house, you put yourself at greater financial risk if something happens. Buying a home with no down payment or a low down payment while keeping an emergency fund is a much smarter financial move.
A good first step is to speak to a mortgage or real estate professional about your current situation and ask about what programs you may qualify for. The most important part of the home financing process is determining how much home you can afford and what you can comfortably pay towards your mortgage monthly. Speaking with someone in the industry is the best way to get started. We’re here to help. If you’re ready to buy a home but not quite sure you’re financially ready, contact Amberwood Real Estate today. We help homebuyers just like you get into homes they love to live in.