Can I buy a house without a large down payment?
Absolutely, says Ivan Simental, mortgage advisor at @theivansimental and host of The Mortgage Reports podcast.
In a recent episode, Ivan spoke about low and low down payment home loan programs.
If you're lucky enough to find a home in today's wild market, here's what you need to know about your options for investing little or no money.
Check your low deposit eligibility (June 19, 2021)
Hear Ivan on The Mortgage Reports Podcast!
House purchase costs: down payment and closing costs
Ivan initially explained that there are two main costs involved in buying a new home: the down payment, which can range from 0% to 20% of the sale price, and the closing costs of your home loan.
Closing costs, Ivan noted, is the cost of maintaining the house outside of the down payment. These usually add 2-5% of the loan amount to your expenses.
For example, if your loan amount is $ 200,000, the closing cost could be anywhere from $ 4,000 to $ 10,000.
Closing costs include things like:
Appraisal FeesCredit InformationCredit ProcessingUnderwritingTitle Insurance Trust AccountVarious Fees
It is important to save these fees on top of the deposit. Even if you qualify for a zero sale mortgage loan, you will still need to cover the closing costs.
Some buyers manage to get the seller to pay their closing costs (although this works much better in a buyer's market than in a seller's market we are currently in). And some qualify for graduation grant. But many have to pay out of pocket.
A mortgage lender can tell you what your closing costs will be so that you can plan for those expenses in addition to your down payment.
Home Buyer First Time Loans Without Deduction
Ivan next discussed some of the zero down payment programs available that allow an individual or family to buy a home with a 0% discount.
The two main programs for buying a home with no money are:
The VA Loan Program
This loan program is for active service members of the military, veterans, or their spouses and provides 100 percent real estate finance. In other words, you don't have to pay anything out of pocket for the purchase price.
One of the main advantages of the VA loan program is that the interest rates are typically lower than the market rate.
Overview of VA loans:
Minimum Down Payment0% Minimum Credit Score580-620 (in most cases) Mortgage Insurance NoIncome LimitsNoAdditional Upfront FeesVA Financing Fee – Varies Loan LimitsNo
Requirements for a VA loan:
The Department of Veterans Affairs offers the VA loan program to help military personnel buy a home more affordable.
To qualify for this loan, you must be one of the following:
A veteranA active member of the military Honorable dischargeA member of the National Guard or Reserve who has served for 6 years
Surviving spouses of a member of the military who died on duty may also be eligible.
The exact loan requirements for the VA loan can be "tricky," explained Ivan.
He noted that technically there are no creditworthiness requirements and you will either qualify for the loan or not.
Lenders will review your complete application – including your loan history, down payment, current debt load, and income – to make a decision on your loan approval.
"I've seen VA loans qualify with a FICO score of 550 or 650, and I've also seen them get rejected on that FICO score," he added. "It all depends on how it is structured and how it is put together when it is submitted for underwriting."
Advantages of the VA loan:
Overall, however, he said that a VA loan is quite flexible and borrowers may be able to qualify even with a low credit score.
"Just keep that in mind when you are thinking of taking advantage of your VA benefits and you think your credit rating is not very good," he advised. "You could miss out on yourself and you could qualify for a home loan with the current FICO you have right now."
He recommended that if you meet the qualifications as a Veteran or Active Military Person, you should speak to a professional to see if you are eligible for this program.
Check Your VA Loan Eligibility (June 19, 2021)
The USDA Loan Program
USDA loans are a lesser known zero down payment option for first time home buyers.
These loans, supported by the US Department of Agriculture, are also known as "Rural Development Loans".
Like the VA loan, loans through the USDA typically have lower interest rates than the standard mortgage rate as the goal of this program is to stimulate home ownership and economic development in these more rural areas.
USDA Loan Summary:
Minimum Down Payment0% Minimum Credit640 (in most cases) Mortgage Insurance Required Income LimitsMax. 115% of median region incomeAdditional upfront fees Prepayment Guarantee Fee – 1% of loan amount Credit limitNo
USDA credit qualifications:
The main requirement for the USDA loan is that the property must be in a USDA designated zone in order to qualify.
One important distinction Ivan made about USDA loans, however, is that while many people consider them rural loans, they don't necessarily apply to rural areas only – there are plenty of suburban areas that qualify as well.
"There are certain zones that you might not think are USDA, but they actually are," he noted.
One requirement that distinguishes a USDA loan from other low and zero cash mortgages is that borrowers must adhere to local income limits.
This program is designed to help low- and middle-income tenants become homeowners.
To qualify, your household income cannot be more than 115% of the median income in the region where you shop. You can check your local USDA income limits here.
Most lenders require a credit rating of at least 640 to qualify for the USDA lending program. However, mortgage lenders can set their own rules and some may require higher credit ratings.
Likewise, some may allow a lower FICO score if your application has significant “compensation factors”. This could be things like an extremely low debt to income ratio or a larger down payment.
In other words, lenders can often be flexible. So if you are unsure if you would qualify, this is worth checking out.
Ivan recommended speaking to a loan professional and checking the USDA loan card to see if your region is eligible for this type of loan.
Check Your USDA Loan Eligibility (June 19, 2021)
Low down payment for first time home buyers
Not all first-time home buyers qualify for a no-deposit loan. That's because the VA and USDA programs have special admission requirements.
But that doesn't mean you are running out of options. If you can't get a zero down mortgage, check out one of the many low down payment loan options available in the market today.
If you can secure a 3% or 3.5% discount on a loan and cover part or all of the amount through a down payment assistance program, you can still move into a home with very little of your own.
Federal Housing Administration (FHA) Loans
A popular option for a first mortgage is the FHA loan program.
“The Federal Housing Administration doesn't necessarily lend you money,” Ivan explains of this option. "But it ensures that if something goes wrong with your loan, the lender will be paid back."
This assurance to the lender comes at a price: no matter how much money they deposit, borrowers have to pay for mortgage insurance.
However, this program still offers many advantages, such as competitive mortgage rates and a low down payment.
FHA loan overview:
Minimum Down Payment3.5% Minimum Credit580 (in most cases) Mortgage Insurance Required Income LimitsNoAdditional Upfront ChargesPrepaid Mortgage Insurance Premium (UFMIP) – 1.75% of loan amountCredit LimitYes; $ 356,362 for a single family home in most areas
The down payment for an FHA loan can go up to 3.5% with a credit score of just 580.
In fact, you can qualify for this loan with a credit score of just 500. However, a lower FICO value will require a higher deposit. Borrowers need at least 10% less if their score is between 500 and 580. (Also, it will be harder to find a lender willing to approve you.)
Other cool things about this loan? If you don't have the cash to pay your deposit, a gift from a family member can help cover it.
Second, if you don't want to prepay the mortgage insurance fee when you take out the loan, you can incorporate it into your loan so that you pay it off monthly rather than all at once.
Other FHA requirements:
The loan sizes available on an FHA loan vary from county to county and state to state.
If you live in an expensive state, your FHA loan limit will be higher and vice versa. The credit limits change every year.
Also note that the home you are buying must be a primary residence. The same goes for VA and USDA loans. You must live in the property all day, which means it cannot be a vacation home or investment property.
Check Your FHA Loan Eligibility (June 19, 2021)
First time home buyers with minimal savings but good credit should consider a conventional low down payment mortgage.
Most people think of conventional loans when they think of a “typical” mortgage. They are available from almost every mortgage lender, and home buyers can choose from a wide variety of loan terms.
For example, you can choose between a fixed-rate or adjustable-rate mortgage, and many lenders offer you a loan period of between 10 and 30 years.
Conventional credit requirements:
Minimum Down Payment 3% Minimum Credit Score620 Mortgage Insurance Required If Less Than 20% Lower Income LimitsNoAdditional Upfront FeesNoCredit LimitsYes; $ 548,250 for a single family home in most areas
Private Mortgage Insurance (PMI):
Like the FHA program, conventional loans require mortgage insurance for those who make a small down payment.
If the decline is less than 20%, homebuyers pay private mortgage insurance (PMI) every month. This increases your monthly mortgage payment compared to a buyer with 20% less.
But the conventional loan program has some distinct advantages over FHA.
Conventional credit services:
If your loan balance falls below 80% of the value of your home – meaning your mortgage lending value, or "LTV" is below 80% – you can cancel your PMI. This will greatly reduce your mortgage payments later on.
In comparison, FHA borrowers often have to pay for mortgage insurance for the life of the loan or until refinancing.
In addition, conventional mortgage borrowers are rewarded for higher credit scores or higher down payments.
For example, if you have great credit and suffer 5-10%, you are likely to get a lower mortgage rate than an FHA loan. And lower rates can translate into big savings on mortgage rates.
Check your conventional creditworthiness (06/19/2021)
Advance payment support programs
We mentioned above that even home buyers without a down payment will have to pay for the closing costs and upfront fees. But the money doesn't always have to come from your own savings.
A great resource Ivan spoke about was the Down Payment Assistance Programs (DPA).
These are grant or loan programs that are provided by state and local governments to help qualified individuals who do not have the full down payment amount.
Down payment assistance may offer a grant or loan to help cover your down payment and / or closing costs.
Since these are usually grants or forgivable loans, the money often does not have to be paid back.
Ivan explained that the specific programs vary by state. You'll need to check with your local housing authority as to what exactly is available in your area, along with minimum credit and other requirements.
However, in general, most of these programs have:
Minimum requirements for FICO (often 640 or higher) Min. and max. income requirements
“Often times people get disqualified from down payment assistance programs because of FICO,” noted Ivan.
"The same goes for income requirements – you cannot earn more than a certain amount to qualify for these grants as they are government grants."
Types of deposit assistance
Ivan says there are four categories of down payment assistance provided by many of these programs:
2% of the loan amount, 3% of the loan amount, 4% of the loan amount, 5% of the loan amount
The percentage is the amount the state will give you for your down payment and / or closing costs. For example, if you opt for the 2% option, you will receive 2% of the purchase price of the house as a down payment and closing costs.
How you use the money is up to you – you can split everything up for the down payment, everything for the closing costs, or the amount.
The main catch with this type of program is that the more support you get, the higher your interest rate will be. So if you choose the 5% program, your interest rate will be higher than someone who chose the 2% option.
How to Find Programs for First Time Home Buyers
Here, too, the support provided when purchasing a home for the first time varies greatly depending on the state, city and district.
Ivan mentioned a couple of good options in his home state of Nevada, namely:
Start this guide to Deposit Assistance in all 50 states to get an idea of local programs.
You can also ask your loan officer or real estate agent for recommendations. These professionals have worked with buyers in the past who have used down payment assistance and can likely point you to programs that you may qualify for.
Example of a cheap home purchase
Down payment assistance can be a great option for people looking to cut their up-front costs.
If you qualify for a low or zero rate loan and assistance with your upfront fees, you may end up paying very little out of pocket.
Ivan shared the story of someone he knew who used the 4% DPA option and had the closing costs covered by the seller. They could get into a house out of pocket for around $ 1,200.
"It was ridiculously low which is great," said Ivan.
There are some caveats with these down aid programs, Ivan also warned, that usually include restrictions on when you can sell and refinance. If you decide to sell or refinance, you will have to pay a proportionate amount of the outstanding amount.
These programs are usually best for homeowners who want to stay in the home for at least 5 years after the purchase.
Which Home Buyer Initial Loan Is Best For Me?
Choosing the best mortgage loan is one of the most important decisions you will make as a future homeowner.
The type of credit you choose determines:
Whether or not you qualify for a mortgageHow much money you need to depositYour mortgage rateYour long-term costsThe price of home ownership that you can afford
You should find the type of loan that will give you the lowest interest rate, because even a small difference in interest rates can cost you or save thousands in the long run.
This is a lot of money at stake, so don't make this decision lightly. Explore all of your options and don't be afraid to ask for help if you need it.
Ivan reminds listeners to come back with any questions they may have and contact a professional for details on what loans are available to them.
Final tips for first time home buyers
Buying a home can be complicated. But it's absolutely doable if you take it one step at a time.
Here are a few things to keep in mind that will help you along the way:
Choose the right loan for first time buyers – Finding the right type of loan can help you qualify and save a lot of moneyPut together a great team – Your real estate agent and mortgage loan officer will help you through the process from choosing a home to choosing a loan type to finding local down payment support programs. Take full advantage of their advice and ask plenty of questionsGet pre-approval before buying a home – One of the biggest mistakes first time home buyers make is not to get a mortgage before buying a home. The pre-approval confirms your eligibility for a home loan and most sellers will not take an offer without a pre-approval letter
Remember, help is only available when you ask! So take advantage of all the resources available to first-time home buyers.
If you find the right loan program you can potentially be in your new home sooner – and for less money – than you ever thought possible.
Confirm your new plan (June 19, 2021)