This article explores a few ways that potential home buyers can accomplish this with low and zero down payment loans and even a gift from family.
This type of mortgage allows you to obtain a home loan without putting any money towards a down payment. This first payment you make toward your new home is paid at the closing of your home loan. Lenders tend to calculate your down payment as a percentage of the total amount you borrowed. If you buy a home for $300,000 and have a 20% down payment, you'll bring $60,000 to the closing. Lenders require a down payment as a way to protect themselves from losing money. Most often, you will not default on your loan if you have an upfront investment in your house. However, we know that saving up for a big chunk of change can be challenging.
A government-backed loan is the only way to acquire a mortgage with major institutions without a down payment. If you stop making your mortgage payments, the federal government will cover your costs (as will the lender). These guaranteed loans are for people who need financial assistance when purchasing a home. These loans are much less risky for the lender, allowing for broader loan criteria to people with more precarious financial situations. The two types of government-sponsored loans that allow no down payment when buying a home are VA loans and USDA loans. Both loans have specific criteria to be met to qualify.
If you're an active-duty service member, a member of the National Guard, a reserves veteran, or the surviving spouse of a deceased veteran, you may qualify for a VA loan. These loans are backed by the Department of Veterans Affairs and are a perfect solution if you cannot afford a down payment.
The United States Department of Agriculture funds USDA loans. These loans are offered specifically to encourage building in rural or suburban areas. There are qualifications for this type of loan, including being in rural or suburban areas. However, a working farm is not viable for this type of loan. The property needs to be a single-family home, and it has to be your primary residence.
There are also financial requirements, such as a combined household income of no more than 115% of the county's average income. The debt to income ratio (DTI) needs to be no higher than 41% on back-end (percentage of gross income spent on debts such as credit cards or car loans) and 29 or 33% front-end (typically calculated as housing expenses). You will also need a FICO® Score of at least 640 for the best chances of qualifying.
Most buyers think to get a conventional loan they will need to have a 20% down payment. Good news -- that isn't necessarily true. As long as you're a first-time homebuyer (someone who hasn't owned real estate in the last three years), you're able to obtain a loan for as little as 3% down. If your down payment is less than 20% of the total loan amount, your lender will require private mortgage Insurance (PMI). PMI protects your lender if you stop making payments.Once your equity on the home reaches 20%, you will be able to cancel your PMI and the payments that come along with it.
If you have a low-to-moderate income compared to others in your area, regardless of being a first-time homeowner, you should consider a Home Ready mortgage from Fannie Mae or a Home Possible loan from Freddie Mac. Both of these lenders allow you to buy a home with a 3% down payment and lower mortgage insurance choices. However, to qualify, you cannot earn more than 80% of the median income in your area.
If you have a low to moderate-income, FHA loans are also an option in which you can put down as little as 3.5% and are backed by the Federal Housing Administration. While FHA loans have fewer requirements than USDA and VA loans, you must plan to live in the property you're buying as your primary residence, buy a home that meets livable standards and move in no more than 60 days upon closing.
FHA loans are also outstanding for people who have a low credit score. A credit score of 580 can get you an FHA loan combined with a lower down payment. If your credit score is lower than 580, you'll be required to have a larger down payment. However, you'll have to make up for it with a larger down payment if your credit score is lower than 580. It may be possible to get a loan with a credit score as low as 500 if you bring a down payment of 10% to closing. You'll need to raise your credit score if it's below 500 or you don't qualify for an FHA loan. A few ways to do that with immediate results are paying an outstanding debt, lowering the amount of money you spend on your credit card, or taking out a small personal loan and paying it back right away.
If you don't qualify for a low down payment loan, down payment assistance (DPA) is another alternative. A DPA could be the perfect solution for you if putting money down on a house is just not feasible and you aren't eligible for a government-backed loan. Requirements for a DPA may vary, so doing some more in-depth research may be very well worth it.
You might be surprised to know that borrowers can be "gifted" money from immediate family members in a mortgage transaction. The gift needs to come with no expectation of repayment and often helps borrowers who cannot afford a down payment obtain a home.
To conclude, buying a home may seem like it is only for the financially stable. However, there are many ways to get the home you want, regardless of your financial situation. Don't give up -- there’s always a way.