Finding money for a down payment to buy a home can feel like a lost cause: After you’ve forked out money for credit card payments, food, rent, as well as other expenses, you might have little or practically nothing remaining in your bank account. Which may have you thinking: Perhaps there is some secret available in the market, somewhere, which could present to you how to buy your dream house without having to put any money for a down payment? Is there such a thing as a no down payment home loan?
No down payment home loans do exist.
Real estate buyers who apply for a mortgage are generally advised to put down a minimum of 3.5% of the purchase price of the property. With the national median home price hovering around $240,000, that ultimately ends up being $8,400. Ouch! Yet a staggering 69% of American citizens have less than $1,000 in savings, according to a newly released survey by GOBankingRates.com. For these people, purchasing a home might seem woefully unrealistic, impossible.
The good news is that in fact there are legitimate solutions that allow a home buyer to put down much less, or even practically nothing for a down payment. Here are a few alternatives to consider, especially if you live in Florida:
USDA 100% loans, as in no down payment
You don’t need to own a cow or a farm to qualify for these loans. In order to fill underpopulated regions of the country, the U.S. Department of Agriculture’s Rural Development office provides mortgages with down payments as small as 0%. The catch? Major cities like Orlando, Tampa, and Miami are not considered rural, but the areas that are outside of these big metropolitan centers are good for this type of loan.
USDA loans for those who qualify as having low or moderate income. But there’s a lot of wiggle room in the words “moderate income”. In areas near Kissimmee (yes, USDA loans are offered there), an individual making $78,000 is considered “moderate income”.
You can read more about USDA loans here.
VA no down payment, 100% financing
The U.S. Department of Veterans Affairs loan program, which began with the creation of the GI Bill of 1944, gives active or retired military or a veteran’s surviving spouse the opportunity to buy a home with no money down.
VA loans also offer attractive interest rates, because they’re not based on a borrower’s credit score, says Katie Miller, vice president of mortgage lending at Navy Federal Credit Union. Given these perks, a VA loan is often your best mortgage option if you qualify.
“Requirements are fairly stringent,” says Miller. VA lenders are typically looking for a credit score of 620, and every VA home loan requires a special appraisal, which includes value the property and a close check of the home’s condition. Consequently, some homes are not eligible, it just means you may have to choose wisely.
What about closing costs?
So, you have figured out how to avoid the down payment, but you still need money for the closing costs. On both the USDA and VA loan programs, if your house appreciates for more than the sales price, you can roll in the closing costs into the loan.
Even if the property does not appraise for above the sales price, you can always ask for seller a contribution, and you can even get the lender and realtor to chip in.
Here are some ways to get closing costs:
1) Ask the seller for a contribution
It does not hurt to ask, so always ask for a contribution. Your Realtor should always ask the seller for money towards closing costs. Even if the seller is hesitant and your Realtor believes that the property will appraise, you can tell the seller to raise the asking price and to give the difference towards your closing costs.
2) Get money from the lender
Yes, you read it right, the lender can actually give money for closing costs, but there is a catch. The lender can do this by raising your rate by a 1/8 of a point (0.125%) or more. For every 1/8 they raise, they pay you back about 1% of the loan amount towards closing costs. This will raise your monthly payment by very little, less than $10 a month per $100K for every 1/8 of a point they add to the rate.
3) Get money from the Realtors
This the one option that real estate agents hate, but as I tell them, it is better to get some commission than no commission at all. A real estate agent can pay out-of-pocket for some expenses, especially the real estate company transaction fee.
Expenses that you absolutely cannot avoid
There are some expenses that unavoidable, and they are paid upfront. These expenses are included in the final closing costs, and you must be ready to pay for these out-of-pocket.
They are as follows:
- Appraisal – These vary from city to city, but here in central Florida, they run anywhere between $500 to $600 or more. The property size also plays a bug a role in the price.
- Home Inspection – Though not obligatory, you should really get this one, and in fact, have to sign a disclosure that you were advised to get it. The inspection is not an appraisal, it a report that details any material problems that the property may have, such as faulty electric or a bad roof. Home inspections run between $200 to $300. Always get one.
There is no such thing as an absolutely no cost home purchase, but you can get very close to having one. Even if the seller and the lender cover all the closing costs you will need about $1,000 in the bank for your appraisal and inspection. You also want to have some extra cash in the bank just to show that you have reserves, lenders love buyers with savings!
If you have any questions, please do contact the author.
Want to see if you qualify for one of these loans? Apply here.