Can I Buy a House With no Money Down?
The dream of owning your own home is divine. What if you have no cash available when it is a real estate contract you want to sign?
You can buy a house without having a cash down payment!
We’ll conduct a quick review of the basic principles regarding the purchase of real estate. Then, we’ll launch into learning loans, gauging grants, and applying for assistance. These options can lead you to your own front door, without a pile of cash in the bank.
Take note that numerical and time-based data are current at the time of the writing.
Buying Real Estate 101
Money in the Bank
Laura wants to purchase a home. The home costs $200,000. Laura does not have $200,000; Laura has $10,000 in her bank account.
She has two options.
- Laura can save money until she has the total amount.
- Laura can withdraw $10,000 as a down payment and apply for a mortgage to cover the $190,000.
A mortgage is a loan used to purchase or maintain a home, land, or other types of real estate, secured by the property itself (Kagan, 2o22).
A loan is a quantity of money provided by a lender, who expects that the money will be paid back in full with interest. Interest is the cost to borrow the money you don’t have and is often a percentage of the quantity borrowed. In Laura’s case, she will pay a percentage of $190,000 in addition to paying back the $190,000.
However, not every prospective home buyer has cash in a bank account.
“No”–t (Much) Money in the Bank
Meet Edward! Edward has enough in the bank for the monthly rent and car payment. His paycheck is already allotted to utilities, groceries, the co-pay for his son’s orthodontist appointment, and snow tires. Though Edward earns excellent reviews as a technician employed by a large electric car manufacturing plant, his employer is not considering salary increases for their employees at this point in time.
Edward doesn’t forecast a change in the situation any time soon. He won’t be able to provide the amount of cash typically required for a down payment required by a conventional mortgage, which ranges from 3%—20% of the cost of the real estate to be purchased.
Edward starts to evaluate his options for a $0 down payment.
Buy Real Estate with a USDA Loan
The first “no down payment required” option we’ll examine is a United States Department of Agriculture (USDA) loan.
What Is a USDA Loan
A USDA loan is a type of mortgage made or backed by the United States Department of Agriculture’s Rural Housing Agency. There are two types of USDA loans.
Both types of loans require a $0 down payment. Guaranteed USDA loans and direct USDA loans have terms of 30 and 33 years, respectively.
For a guaranteed USDA loan, there are three entities involved: the buyer, the USDA, and the lender. The buyer requires a mortgage in order to purchase real estate. The USDA guarantees 90% of a mortgage amount on behalf of the buyer. The lender is a financial institution, such as a bank.
For guaranteed USDA loans, the buyer must pay a loan guarantee fee of 1% of the amount loaned. The buyer also has to pay an annual fee, which is 0.35% of the loan.
A direct USDA loan involves two entities. The loan is issued by the USDA to the buyer. For direct USDA loans, there is no loan guarantee fee but the buyer must pay an interest rate of 2.5% of the loan amount.
Who Can Apply for a USDA Loan?
Individuals (and their families) with low incomes who live in rural areas in America can benefit from USDA loans. Some individuals earning lower wages also face challenging financial situations (e.g., having little to no assets or having lower-than-average credit scores).
It can be difficult to gain ground when you are unable to afford or qualify for standard mortgages. USDA loans provide a financial foundation that offers access to structurally safe homes in sanitary environments.
How Does one Apply for a USDA Loan?
There are application processes for each type of USDA loan. For a guaranteed USDA loan, consider one of the USDA’s approved lenders. For a direct USDA loan, you will apply directly with USDA Rural Development.
Read the Fine Print for USDA Loans
Applicants for USDA loans should be aware of prerequisite conditions.
- A buyer must be a U.S. citizen or one who maintains a legal nonresident non-citizen status.
- A buyer cannot have unpaid federal debt.
Also, both the buyer and the real estate property will be evaluated before a loan will be granted.
Evaluations are based on a set of criteria.
- Income level
- The percentage of your income dedicated to decreasing your debt
- Credit score(s)
- Property Location and type
- Intended property use
Buy Real Estate with a VA Loan
The second “no down payment required” option we’ll examine is a U.S. Department of Veterans Affairs (VA) loan.
What is a VA Loan?
A VA loan is a type of mortgage offered through a program developed by the U.S. Department of Veterans Affairs. There are four types of VA loans. However, in adherence to the topic of buying a home without a cash down payment, we’ll focus on the applicable VA loan type, the Home Purchase loan.
A Home Purchase loan requires a $0 down payment, allowing up to 100% financing on the loan. Interest rates vary depending on the term of the loan (e.g., 15, 20, or 30 years), but generally range from 6.0%—7.23%. Home Purchase loans do not require mortgage insurance but may require a VA Funding Fee (there are exceptions).
For a Home Purchase loan, three entities are involved. They are the buyer, the U.S. Department of Veterans Affairs, and the lender.
The U.S. Department of Veterans Affairs determines qualifying factors a buyer must meet, determines the criteria for the real estate able to be purchased with a VA loan, and guarantees the loan amounts. Note that the U.S. Department of Veterans Affairs is not the lender.
The lender may be a bank, credit union, or savings-and-loan organization. The lender sets the individual loan rates and fees.
Who Can Apply for a VA Loan?
VA loans encompass many who are associated with the U.S. military, as well as U.S. veterans (Lucas, 2021):
- Active-duty U.S. service members
- U.S. Reservists
- Members of the U.S. National Guard
- Cadets in the U.S. Military, Air Force, Coast Guard academies
- Midshipmen in the U.S. Naval Academy
- Officers of the National Oceanic and Atmospheric Administration
- Spouses of U.S. veterans
VA loans require a term of service, listed below (Lucas, 2021):
- 181 days of active duty during peacetime
- 90 days of active duty during wartime
- Six years in the U.S. Reserves or National Guard
How Does One Apply for a VA Loan?
Most lenders that originate VA loans can access your Certificate of Eligibility (COE) available through the U.S. Department of Veterans Affairs. Obtaining your COE is the first step.
Read the Fine Print for VA Loans
Applicants for VA loans should note that military discharge types that are classified as “Other than Honorable” or “Bad Conduct” may undergo additional review before they are granted a VA loan. Veterans who have left military service with a dishonorable discharge are excluded from VA loans.
As with any loan applicant, individuals seeking a VA loan will be subject to reviews of their income, debt, credit scores, and intended property use.
Buy Real Estate Through Government Assistance Grant Programs
Government assistance grant programs require a very low upfront cost or a $0 down payment. Take note that the federal government does not give housing grants to individuals. They fund these efforts through states, commonwealths, and other municipalities.
For buyers seeking state government assistance, it is critical to note the following points:
- There is no grant that will provide for 100% of the housing cost.
- Qualification for a mortgage is a requirement.
- First-time home buyers are required to take a U.S. Department of Housing and Urban Development (HUD)-approved housing counseling class.
The American Dream Downpayment Initiative
The American Dream Downpayment Initiative (ADDI) was signed into law in 2003. ADDI targeted the major hurdle faced by many first-time homebuyers—the large outlay of cash upfront.
Families earning below 80% of the median income for a given area benefit from the provisions of ADDI in these ways:
- assistance with upfront costs of owning real estate, such as closing costs
- coverage of fees such as private lender origination fees, fees associated with obtaining title evidence, legal costs, and appraisal costs
The specific requirements that a buyer needs to meet to benefit from ADDI can be found on the HUD website.
The Housing Choice Voucher Homeownership Program
Through HUD, Public Housing Agencies (PHAs) are set up in American communities. Individual PHAs decide to implement the federal government’s Housing Choice Voucher (HCV) program.
Individuals who want to buy a home can do so through the HCV program. Vouchers can be directed towards purchasing a home and paying for monthly costs associated with home ownership.
To confirm if your local PHA offers the HCV program, check with the HUD website.
Buy Real Estate Through low Down Payment Percentage Loans
Reverting from the topics of grants and vouchers, we’ll evaluate a few more options for loans that require a lower down payment.
Federal Housing Authority (FHA) Loan
FHA loans are backed by the U.S. government and offered to buyers by FHA-approved lenders. As with a guaranteed USDA loan and a Home Purchase VA loan, the buyer is not getting a loan from the U.S. government. FHA loans differ from conventional loans, which are backed by a financial institution, a credit union, or a mortgage company.
While “credit score” is the accepted terminology, take note that individuals have several credit scores. Multiple agencies gather individuals’ financial data and enter it into proprietary mathematical formulas, from which a credit score is derived. Thus, a credit score is determined uniquely by each agency.
Thus, if there are five discrete agencies, an individual will have five potentially different credit scores. For the purpose of this post, we will use the term “credit score.”
FHA loans require a 3.5% down payment for credit scores of 580 and above. A down payment of 10% is required for credit scores below 580. While 10% is significantly higher than 3.5%, it is much lower than down payments in many conventional loans.
Be sure to dig into the details beyond the 3.5% down payment. Remember what your grandparent or foster parent may have told you, “There is no such thing as a free lunch.”
- A buyer using an FHA loan is required to pay a mortgage insurance premium (MIP). MIPs are paid in a lump sum (less than 2% of the loan) or paid annually (less than 1% of the loan).
- Evidence of steady employment is required.
- The FHA will inspect and have to approve the house.
Take note that, unlike most other loans, FHA loans allow someone to “gift” 100% of the 3.5% down payment. In Edward’s case, his grandmother may write a check to cover the 3.5%.
HomeReady or HomePossible Loans
HomeReady loans are offered by the Federal National Mortgage Association (“Fannie May”). Home Possible loans are offered by the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
Fannie May and Freddie Mac are federally-backed home mortgage companies, created by the U.S. Congress (Folger, 2021). They do not originate or service loans. They buy and guarantee mortgages through lenders in the secondary mortgage market (Kagan, 2022).
For the purposes of this post, we’ll look specifically at the loans they offer.
The overlapping attributes of a HomeReady loan and a Home Possible loan are listed:
- First-time and repeat buyers can benefit.
- A buyer’s income must be 80% below the area’s median income.
- The down payment is 3%, which can be gifted from a friend or family member.
Distinctions include the following:
- HomeReady loans require a credit score of 620 or higher.
- HomeReady loans will take into consideration not only the buyer’s income, but income from a co-signer, roommate, or boarder.
- Home Possible loans require a credit score of 660 or higher.
The Conventional 97% (3% Down) Loan
In recent years, some lenders have moved away from requiring the customary 5% (and higher) down payment to the lower 3% down payment.
Referred to as a “Conventional 97” mortgage, you may want to consider it if the situations below describe your financial situation.
- You have good or excellent credit.
- You have a modest amount of savings, but a typical 5% or greater down payment would erode the savings.
- You are able and want to buy a house that costs more than FHA loan limits allow.
“Conventional 97” mortgages have more limitations than conventional mortgages. Again, you will want to read the details of the loan closely.
Buy Real Estate Through a Second Loan
We are going to take the concept of a loan and demonstrate another way to use it. In conventional mortgages and the options presented in this post, we’ve considered one loan for a set amount of money.
You have the option of taking a second loan out. Let’s look into that by studying Tanisha’s situation.
Tanisha plans to buy a house that costs $60,000. Let’s look at what Tanisha can do with one loan versus two loans.
Tanisha takes out a loan to cover 85% of the home’s cost ($51,000). Her down payment is $9,000. Since her down payment is less than 20%, she will have to pay for Private Mortgage Insurance (PMI), which is selected by the lender. PMI typically ranges between 0.3%—1.5% of the loan amount.
Tanisha takes out a loan to cover 80% of the home’s cost ($48,000). She takes a second loan to cover another 10% of the home’s cost ($6,000). Her down payment is $6,000.
Comparing the Loan Options
By taking one loan, Tanisha pays a larger amount for the down payment ($9,000) and has to pay for PMI.
By taking two loans, Tanisha pays a smaller amount for the down payment ($6,000) and avoids paying PMI. However, second loans often have higher interest rates and closing costs must be paid for both loans.
Tanisha will evaluate the PMI rate chosen by her lender, the interest rate on the second loan, and the total closing costs for both loans. Good thinking, Tanisha!
Who knew there were so many options for $0 or a very low down payment? Through this post, you started your own exploration to find the option that might fit your current situation and needs. Continue on your journey towards home ownership with real estate author and expert—Diana.