3 Ways To Buy a House With No Down Payment
There are a few ways to buy a house with no down payment. How you go about it depends on either your eligibility or your home’s eligibility.
No fancy footwork here with a clever intro to hook you into reading more. Let’s just jump in.
Option #1: USDA Loan
USDA loans are insured by the United States Department of Agriculture and do not require a down payment. However, the catch is the home must be considered eligible. For the home to be considered eligible, it must be in a rural area in need of economic development.
To qualify, most lenders require borrowers to have at least a 640 credit score. However, if your score is lower than that, it just means you won’t be automatically approved. You could still be manually underwritten should you meet all other requirements (plus many USDA lenders allow non-traditional ways of evaluating worthy borrowers, such as on-time rent payments).
Your income also must not exceed 115% of your area’s median income. To see what that is for your area, check out the USDA interactive map and select your desired county.
Next, you’ll need to see if the house you want to purchase is eligible. To see if it is, click here.
How to Apply:
To get a USDA loan you don’t apply for it through the government. You simply go through a lender the same as you normally would. Just make sure the lender works with USDA loans. (Here’s a full list of banks currently offering USDA loans, but don’t be afraid to call and ask if you don’t see your preferred lender.)
Why You Should Keep USDA on Your Shortlist:
Don’t think that USDA loans only approve of houses completely surrounded by pastures or woods, and that the house must be in the proverbial sticks. This is simply not true. Many houses greenlit for USDA loans are in suburban counties with ‘civilization’ only a 3-5 minute drive away. For whatever reason, the house is in an area the USDA wants to further develop— meaning it may already be pretty developed.
If you can’t make a down payment, and you don’t want to purchase a house in a city, this may very well be the program for you. You can even get closing costs rolled in if the house appraises for more than the purchase price. Closing costs typically range anywhere from $3,000 to $7,500, so if you make an offer for $10,000 less than the asking price (which is completely reasonable), you could very well end up not having to pay for closing costs either (but of course the amount will be added to your total loan).
Option #2: VA Loan
If you served, or are currently serving in the U.S. military, you and your spouse are eligible to receive a VA loan. It doesn’t require any down payment and you are not penalized with monthly PMI payments for not having 20% equity in your new house (a great perk).
Eligibility varies depending on whether you are actively serving or not. For a full list of eligibility requirements, click here.
There are loan limits depending on the county where you to plan to purchase. Thankfully, as with USDA, there is a chart for your reference (click here). Just ctrl+f your county, and match up the results with your desired state.
Things to Keep in Mind:
If your house is over the purchase limit, you can still get the loan, but you’ll need to make a partial down payment. When this happens, you take the purchase price of the house, subtract it from the loan limit, and then multiply the difference by 25%. (Example: Campbell County VA has a one-unit loan limit of $453,100. If the purchase price of the house is $475,000, the borrower would be responsible for $5,475.)
Though there is not a down payment requirement (for most buyers) or PMI requirement, there is a funding fee. It can range anywhere from 1.25% to 3.3% of the purchase price. Just how much you’ll have to pay depends on whether you’ve taken out a VA loan before, whether you are in active duty, and the size of your down payment.
Option #3: Down Payment Assistance
Perhaps the least well known way to avoid making a down payment is using a down payment assistance program, aka DPA. There are all kinds of DPAs to be used, many of which are national, statewide, or local. Many are second mortgages that have to be repaid, but have generous 0% 30 year deferred payment options. Some are grants that never have to be repaid as long as you live in the property for a set period, and a few take compensation through taking a share of your home’s appreciation when you sell.
There really are all kinds of DPAs out there. You just have to look.
How to Find One That Works for You:
We’re currently working on a master list of every DPA program in the United States. However, that said, that doesn’t mean you have to wait. To find a DPA program suitable for you and your family, first do a search of your county or city. Example: Seattle, Washington, down payment assistance first time home buyer.
If a local result doesn’t yield any good results, go to the state level and do the same thing: Washington state down payment assistance first time home buyer.
Of course, you could always go to the national level, but the best ones are usually county or city specific.
There are a lot out there, so don’t give up if you don’t find one in five minutes.
Most DPAs require you to work with specific lenders, have a certain maximum income, be a first time buyer (or not have owned a house in the past three years), and take a free educational course— all of which are easy requirements to meet.
Don’t assume you make too much because you have a decent, well-paying job. The income limits are generally just placed to ensure that there’s enough money to distribute assistance to people who actually need it— meaning not the 1%.
Also know that going through a DPA program doesn’t hurt your credit score or look bad on your credit report. Make your payments when you’re supposed to make them (if any are required), and it’s the same as any other debt (assuming it’s not a grant).
What Are the Downsides to Not Making a Down Payment?
When you make a low or zero down payment, this means you’ll have little equity in your house when first starting out. Note that this shouldn’t affect your interest rate too much if you use a USDA or VA loan. With a down payment assistance (DPA), you’re still making a down payment, but it is unconventional. That said, there are two things you’ll want to keep in mind regardless of what path you take:
Your DTI (debt-to-income) will be higher. It won’t affect your ability to get a mortgage or DPA loan, but it may affect your ability to get additional lines of credit in the future (like a new credit card or auto loan). Most lenders like for borrowers’ DTIs to be at or below 40%. A low down payment means a higher monthly mortgage payment, which means a higher DTI.
You may have to pay for private mortgage insurance (aka PMI). This is a monthly fee that lenders tack on to cover their cost to insure your loan should you stop making payments. Most loans (except FHA) will have this fee tacked on until you reach 20% equity (Note: FHA has it attached for the life of the loan if you don’t put 20% down from the start). PMI payments make your monthly payments higher. The average PMI fee is about $80 a month, which really adds up over the years.
All in All, You’ve Got Options
Buying a house is a great investment, regardless of how big or awesome the house is. Houses across the nation are appreciating at great rates. If you buy now and choose to sell in only five years, you’ll likely come out well ahead of where you started.