How to Buy a Home, Even if You Have Just a Small, or No down Payment

Approximately 34% of US households do not currently own a home. According to the National Multifamily Housing Council, there are over 43 million households in the United States occupied by renters.

There are a number of reasons of course for not owning a home. However, one of the biggest perceived obstacles to homeownership is: Lack of a large down payment. The good news is, there are hundreds of programs available to purchase a home with a very small down payment or even no down payment at all. We are going to explore the top programs to buy a home with zero down. We are also going to look at the most current programs available to buy a home with a small down payment.

The Best Zero Down Payment Home Loans

Whether you are a first time home buyer or not, you can buy a home with zero down payment. It is a common misunderstanding, even amongst Real Estate and lending professionals, that if you want to qualify for a zero-down mortgage, you have to be a first time home buyer. That is simply not the case.

VA Loans

Those who have served their country, are able to purchase a home using the home financing programs offered through the Department of Veterans Affairs. Qualifying borrowers can get a VA loan with no down payment required. In fact, if the veteran works with the right Real Estate and Lending team, they can move into a home with zero down and zero closing costs. Great features of VA Loans:

• Zero down payment required
• Generous “Debt To Income” ratios. Whereas many other programs cap out at hard 50% DTI, it is not uncommon to have a 60% DTI VA loan approved when the right elements are in place. VA uses “Residual Income” as a compensating factor where no other type of loan uses this, and is what usually makes a big difference in high DTI approvals.
• No minimum FICO score required. That’s right, the official VA requirement does not have a minimum FICO requirement. Be aware though, different lenders may have what is called a “Lender Overlay” and they may have one themselves. Shop around of course if need a more flexible lender.
• Generally easier to qualify for than any other type of loan. The loans are guaranteed by the US government and lenders are protected against loss through the VA Loan Guaranty, making it easier for lenders to be a bit “loose” with some of their guidelines.

USDA Loans

The United States Department of Agriculture has been offering zero down home loans in designated areas since 1949. They offer affordable loans with zero down on properties that fall within their designated eligibility areas. You will find it encouraging to find out that 97% of the US Land is USDA eligible for a home loan. Do note that location is a hard rule to qualify for USDA loans. To check areas of eligibility and other questions regarding USA Loans, click here to visit their website. Features of USDA Loans.

• 100% financing available in designated areas
• Affordable interest rates
• No first time home buyer requirements
• Lower fees than VA loans in some cases.

Home Possible Program® by FHLMC (Freddie Mac)

The Federal Home Loan Mortgage Corporation (FHLMC/Freddie Mac) is one of the largest purchasers of loans in the secondary market. They are a powerhouse of mortgages and strong promoters of homeownership. The Home Possible Program allows borrowers to buy a home with no minimum investment from the borrower, which means there is no requirement for the home buyer to use their own funds as the source of downpayment. Combining this program with their “Affordable Seconds” program, a buyer can purchase a home with zero downpayment and zero closing costs. Features of the Home Possible and Affordable Seconds program:

• No minimum investment from the buyer/borrower required. 
• Combine both programs to purchase a home with zero down and zero closing costs when structured properly (make sure you work with a knowledgeable lender and Real Estate agent to maximize the potential of this program)
• No requirement to be a first time home buyer.

Local Programs Offered by Federal and State Agencies

In addition to VA and USDA loans, there are hundreds of other programs available through the United States to help would-be home buyers purchase a home with zero down. The department of Housing And Urban Development (HUD) pours billions of dollars into programs intended to help communities grow or redevelop. 

The simplest way to find out if there are funds available in your area for homebuyer assistance is to call your city or county’s urban development department. Every state, city, and county have them. 

Just to give you a few examples of what is available at the state level in some areas; California has a well funded and very popular program through the California Housing Finance Agency (CalFHA). They provide up to 106% financing throughout the state of California for qualified buyers. They have special financing for Teachers and other members of the educational system which gives them even more perks.

The city of Atlanta has funds available through their economic development department which can assist home buyers with up to $40,000 in down payment assistance. You can visit their website for more information on their down payment assistance program.

The state of Washington has its own Housing Finance Commission program to help Washington State residents buy a home. Assistance ranges from  $10,000 up to $55,000 for buyers within the city of Seattle.

Down payment assistance money is everywhere, and it is not difficult to find. If you contact a few local Real Estate agents or mortgage lenders also, you will find programs specific to your location and needs.

Low Down Payment Programs

One of the biggest misconceptions of home buyers, especially those buying for the first time, is that you need 10-20% down payment to buy a home. In reality, you can buy a home with a small down payment, as low as 3.5%. Since we covered the fact that you can buy a home with zero downpayment, what is the benefit of using a small downpayment instead?

Generally speaking, most of the zero downpayment programs have some restrictions. The first benefit of using a small down is that you will not be restricted by requirement such as location restrictions for USDA loans, having served in the military for VA loans, and income and purchase price limits which are common on most zero down programs. The other benefit of putting some money down towards a home purchase is that you will get a better interest rate most of the time. Let’s go over some of the most common low downpayment mortgages.

FHA Loans

Without a doubt the most popular type of loan with first time home buyers and those whose buyer profile needs more liberal guidelines. A standard FHA loan only requires 3.5% downpayment and that can even be a gift from a blood relative or someone with a “family-like” relationship to the borrower/buyer. FHA interest rates are very competitive and overall underwriting guidelines are very “accommodating” to many buyer’s needs. If you don’t have an extensive credit file, and your FICO score is under 620, FHA comes to the rescue where other loans would not be possible. Features of FHA loans:

• Only a small downpayment of 3.5% is needed. Can be a gift and no pricing or interest adjustment will be applied. You can also get a 2nd from an approved source for the downpayment, but lenders will usually charge extra points or add to the rate if that is the case.
• Credit scores as low as 580 can still qualify you for a loan with the minimum of 3.5% downpayment.
• No income or location restrictions
• Can use non-occupying co-borrowers. If you have brothers, sisters, parents etc. They can help you qualify for the loan if they meet the guidelines.

Federal National Mortgage Association (FNMA/FannieMae) 3% Downpayment Program

FannieMae is the largest purchaser of conventional mortgages in the US. They are heavily vested in promoting homeownership and have a plethora of programs to help home buyers purchase a home with little and no downpayment options. Their 3% downpayment program is geared towards those buyers with limited financial resources and good credit. Features of the program:

• Only 3% downpayment required
• Minimum FICO score of 680
• Can be combined with “Community Seconds” for zero downpayment purchase
• Cancellable mortgage insurance. Unlike FHA products that carry mortgage insurance for the life of the loan.

Homeownership IS Possible Even if You Don’t Have a Large Downpayment

As you can see, there are abundant ways of getting into a home if you are willing to put a little extra effort to find the right programs to fund your purchase. If you are currently renting a paying an average rental amount in your area, there is a strong possibility that your mortgage payment may be actually lower than your rent. If you also consider that when you move to a new rental, you have to come up with first and last month’s rent plus a security deposit, there is definitely a possibility that if you can do that, you can buy a home of your own. Align yourself with the right team and the dream of homeownership may be easier than you realize.