It is a widely held belief that you need to put 10-20% down to buy a house. The truth is, you can buy a house with as little as ZERO down payment, and if you have the right programs in place, you can get into your own home with ZERO OUT OF POCKET!
If you are in disbelief or think this sounds like one of those midnight TV infomercials with some dubious-looking characters pitching a course or program for thousands of dollars, rest at ease. There are hundreds of 100% legitimate programs by States and the Federal Government to promote homeownership.
Let’s review some of the most common and widely used programs to buy a house with no down payment.
VA Loans
If you are a veteran, you may already know that you can use your VA benefits to buy a home with zero down payment.
VA loans are the most common loans that offer zero down payment financing. Rates are very attractive, and it is relatively simple to qualify. You need a stable job that provides enough income to qualify, and your credit needs to be decent, not perfect.
One of the many advantages of VA loans is that underwriting is very flexible. Since the loans are guaranteed by the Federal Government, lenders are usually somewhat forgiving in areas such as credit and income to qualify.
Lenders use a system called Automated Underwriting System (AUS) to submit the loan file and determine if it qualifies for financing. Most loans are submitted through AUS nowadays; however, with VA loans, the qualification parameters are much more lenient.
Take credit scores, for instance. Most other loans require a minimum credit score to qualify for a mortgage. VA loans do not have a minimum credit score requirement per se, although each lender can set their own standards.
If your credit score is under 600, you can’t get a conventional loan practically anywhere, even with a sizeable down payment. VA loans can be approved with as low as 580 FICO with zero down payment.
Another area that VA loans are lenient on is what is called the Debt To Income ratio (DTI). That is the ratio of your debt compared to your monthly income. Just about every other loan type is capped at 45-50% DTI. VA loans do not have a maximum DTI. VA loans rely on another factor that determines whether the borrower can afford the payment or not; Disposable Income.
If your debt-to-income ratio is very high, but you have sufficient disposable income, your loan will be approved.
If you are a veteran, VA loans are by far the best way to get into a home with zero down payment. Even more, if you negotiate your purchase contract right, you can have the seller or the Real Estate agent pay your closing costs and get in with ZERO out of pocket!
USDA Loans
USDA loans are offered by the United States Department of Agriculture. The purpose of these loans is to give people in rural areas the ability to become homeowners without a large outlay of money.
People in rural areas tend to make less money, thus the need to make it easier to get into a home.
Here is a bit of a secret you may not get in many other places. There are communities in well-populated areas that are considered rural. You do not have to buy a home in no man’s land to get a USDA loan.
You also don’t have to buy a run-down shack in the middle of nowhere. A recent search in Rocky Point, North Carolina, showed a home priced at $699,900 to be located in an area eligible for a USDA loan. This is a nice home and community that most would be happy to live in.
You can find out if your area of choice for a home is in a USDA-qualified area here.
Down Payment Assistance Programs
The most widely available and also underused programs to buy a home with zero down are the many Down Payment Assistance (DPA) programs.
Practically every state in the nation has some form of assistance to help increase the rate of homeownership in the area. In addition, counties and cities also have community redevelopment programs designed to make homeownership more affordable which helps buyers get in with zero down payment.
DPA programs are relatively easy to find, thanks to the power of the internet. Wherever you’d like to buy a home, just search “(city/state) down payment assistance programs,” and you will have a current list of what is available.
DPA programs are usually grants or loans at very low rates that you can use in conjunction with a first mortgage for a total of 100% financing. So yes, with these programs, you will need to also secure a first mortgage.
Not just any first mortgage will do to be combined with a DPA program, although you do have a few choices.
First Mortgage Loans You Can Use to Combine with DPA Programs to Buy a Home with No Down
FHA Loans
FHA loans are the most common type of first mortgage that will go well with a Down Payment Assistance program. FHA loans are part of the Department of Housing and Urban Development (HUD) which is also the department that develops many of the DPA programs. They are a natural pairing.
Conventional Loans
Traditionally, conventional loans require a larger down payment, 10-20%. However, there are a few agency loans that are specifically designed to cater to first-time home buyers. These same loans allow pairing with DPA programs so buyers can get in with zero down payment.
Home Ready program from Fannie Mae
This loan program only requires a 3% downpayment. Combined with a DPA program, it will go up to 105% CLTV which means buyers can combine a DPA program to cover the down payment and closing costs. Theoretically, this makes it possible for buyers to get in with no out-of-pocket for down or closing costs; it can all be covered by combining both loans.
There are some requirements which are more stringent than on standard conventional purchases where the borrower puts up a down payment.
The borrower income limit is capped at 80% of the area median income (AMI). The borrower will also have to take a Homeownership Education course by an approved provider.
Home Possible program from Freddie Mac
Freddie Mac also offers a 3% downpayment program that can be combined with a DPA program to buy a home with zero down.
There are many similarities between the Home Ready and Home Possible programs. The AMI income limit is also 80%, and the borrower has to take a Homeownership Education course. The program can also be combined with a DPA program for a total LTV of up to 105%.
There are a couple of differences worth noting, though. The credit score for Home Possible is slightly higher than for Home Ready. The minimum decision credit score is 660 as opposed to 620 for Home Ready.
Another important distinction is that on Home Possible, the property can be a 1-4 unit property. Home Ready only allows single-family properties. This can be a big deal since buyers can purchase up to four units with Freddie Mac’s program. This can mean income from the units that are not occupied by the buyer. It can also mean that multiple families can join together to buy a property with more than one unit, and they can each have their own unit.
Taking the Next Step
Homeownership is within reach of millions of people who are still renting. Most people are not aware of these options that give them a chance to buy a home without having to put up a large down payment.
In many instances, it takes less money to buy a house than it takes to move from one rental to another. Moving from one rental to another requires the first month’s rent plus a security deposit which can add up to thousands of dollars. Why not take the leap and see if you can own your next home rather than rent?
Talk to a qualified expert in Down Payment Assistance programs and see if you can stop renting and start owning.