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Buying a home is considered by many as the “American Dream.” This “dream,” however, is often not obtainable by many buyers. One major reason why some buyers cannot buy a home is due to their credit scores. Every loan program and lender is different, however, each one has guidelines when it comes to credit scores. Most lenders will not give a mortgage to anyone without a credit score of 640 or above!
Another big reason why buyers cannot purchase a home is due to not having enough money, or no money! Buying a home is not cheap, but it can be done with little or no money! There are different types of loans, grants, and incentives available to not only first time home buyers, but buyers in general!
What does this mean for the buyer who has a 740 credit score but no money available? It means they are now able to buy a home with little to zero of their own money and no longer have to wait several months or years to purchase!
So what type of programs are available for buyers with little or no money? I reached out to my good friend and mortgage expert Luke Skar from Inlanta Mortgage to get his advice and expertise on this topic.
First off, thank you Kyle for the opportunity to give my expertise on this topic as it is a very common question that is asked by potential buyers who don’t have any money or very little to work with! Buying a home seems like a daunting task to many first time buyers. After all, it can’t be as simple as getting a loan on an automobile with no down payment, right? While there is a bit more paperwork and time needed to complete a home loan it is still possible to purchase a house with either zero down payment or very little down payment.
There are actually multiple ways to buy a home without a down payment. In addition there are some other considerations potential buyers need to understand when using this kind of buying strategy. Listed below are the different ways to buy a home without paying 20% down.
1st Method: VA Home Loan
The Veterans Administration (VA) oversees the rules for lending mortgages to veterans. The VA does not issue the loans itself but instead grants authority to banks, mortgage lenders and credit unions to offer VA mortgages.
For Veterans that meet the proper qualifications, a VA home loan is a great way to purchase a home. First of all, the loan amount can be equal to 100% of the home’s appraised value. Secondly, it is possible for the seller to pay up to 6% of the purchase price in closing costs. Third, the VA is not as strict on credit guidelines as some other mortgages. And fourth, the VA home loan guidelines only use one ratio test to determine if the veteran makes enough money to pay for the home, their current debt and expected living expense.
2nd Method: USDA Mortgage
To some people it may sound strange to hear the acronym USDA associated with a mortgage. That acronym stands for the United States Department of Agriculture. This organization offers funding that will allow borrowers to receive a loan equal to 100% of a home’s appraised value or the selling price, whichever is lower. In addition, much like the VA mortgage, sellers are allowed to pay the closing costs of the mortgage up to a maximum of 6% of the loan amount.
The main caveat to using the USDA mortgage is that the potential home must be within a zone that has been labeled as rural by the USDA. However, that term is a bit misleading to most potential buyers. Most states throughout the country have multiple areas that are zoned as rural. In fact, the outer lying areas of most large cities have at least one area that is a rural zone. Your mortgage lender can look up the address for a potential home and let you know if the property is in the right zone.
3rd Method: FHA Mortgage
For many years the FHA mortgage has been the most popular loan for people buying a home with either little or no money to use as a down payment. The Federal Housing Authority (FHA) operates in a manner similar to the VA. FHA does not offer the loan but rather gives permission to lenders to provide the mortgages according to certain guidelines.
The FHA mortgage has lenient credit standards and will also allow the seller to pay closing costs, much like the VA and USDA loans. The FHA is different in that they do require 3.5% of the purchase price to be paid as a down payment. HOWEVER, this money does not have to come directly from the borrower. The money may come in the form of a gift from a parent or other relative. It can also come from a grant for borrowers that live within cities and counties that offer such programs.
4th Method: Conventional Mortgage With Only 5% Down Payment
When banks first started offering mortgage loans the typical requirement was to ask the buyer to pay 20% of the home’s price as a down payment. Over time, banks realized that borrowers with a solid employment history and good credit were a good risk and gradually lowered that requirement to only 5%. Granted, this may seem like a large amount to some people. However, when looking at a purchase price of $180,000 the 5% of $9,000 seems a lot more feasible than the $36,000 required for a 20% down payment.
A conventional mortgage will require a very high credit score, usually around 700 or more. It will also need a strong employment history. For people that are self-employed, at least 2 years of personal and business tax returns will be necessary.
5th Method: Using Money From Retirement Accounts
Many employers offer a 401-K program or similar retirement system where employees contribute part of their pay and the company will match a percentage of the funds. For people that have been at their job a number of years, they may have a nice nest egg put away. If the employer will allow withdrawals from the account this can be an option to get funds for a down payment on a home. Just be aware that the money will likely have to be paid back if the employee leaves the company.
6th Method: Using Lender Credits
It is actually possible to get the lender to help with part of the down payment and closing costs. Banks, credit unions and mortgage lenders will charge fees in order to facilitate a mortgage loan. Part of the fee comes from the interest rate charged on the loan. Buyers can negotiate to pay a slightly higher mortgage rate in exchange for the lender using part of the fee to cover some of the closing costs or part of the down payment. This is a discussion that will need to be had directly with the mortgage lender since each loan and each lender operates in a different manner.
Disadvantage of Buying a Home With no Money Down
There are some drawbacks to purchasing a home without a large down payment. For people that pay less than 20% down there is a charge called mortgage insurance assessed to the borrower. This charge is usually a percentage of the outstanding loan balance and paid each month.
This insurance is for the benefit of the lender, not the buyer. In the event that the buyer is no longer able to make the payments on the home and the lender must take possession of the property the insurance will pay off some, or all, of the outstanding loan balance.
Buying a home is a sign of maturity and prosperity. Numerous studies have shown that children who grow up in a home owned by the parents are much better off emotionally and socially. Thanks to numerous mortgage programs it is truly possible to buy a home with no down payment and obtain a better social status.
Other Home Buying Resources
Buying a home in Rochester, NY? If you are wondering what mortgage programs are available in Rochester, NY for buyers who have little or no money available, contact us and we’d be happy to recommend a quality mortgage lender! It’s extremely important to find out what the best type of mortgage is best for your individual circumstances!
About the authors: The above article “6 Ways To Buy A Home With Little or No Money” was provided by the Keith Hiscock Sold Team (Keith & Kyle Hiscock). With over 30 years combined experience, if you’re thinking of selling or buying, we’d love to share our knowledge and expertise.
We service the following Greater Rochester NY areas: Irondequoit, Webster, Penfield, Pittsford, Fairport, Brighton, Greece, Gates, Hilton, Brockport, Mendon, Henrietta, Perinton, Churchville, Scottsville, East Rochester, Rush, Honeoye Falls, Chili, and Victor NY.
Visit our website at www.HiscockHomes.com.
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