According to WSJ, nearly two-thirds of renters nationwide say they can’t afford to buy a home, and saving for that down payment isn’t going to get easier soon: Home prices are rising at twice the rate of wage growth.
But, did you know it’s possible to buy a house with no money?
Here’s the gist, there are existing schemes; both government-owned and private-owned that can put the desired keys into your pocket without demanding down payments.
Let’s take a look at some options you have when you want to buy a house without a down payment. We’ll also show you a few alternatives for low-down payment loans as well as what you can do if you have a low credit score. Stay with me!
Table of contents
How can I buy a house with no money down?
You can only buy a house with no money down if you have a government-sponsored loan. Government-backed loans are guaranteed by the federal government. In other words, if you avoid paying back your mortgage, the government (not your lender) will pay the bill.
The government offers covered loans to people who need monetary support to buy a home. These loans from the government are less risky to the borrower and they can extend their usual loan guidelines to people with precarious financial profiles, such as borrowers with no down payment.
To answer the question, how can I buy a house with no money, we’ve put together a list of how to buy a house with no money down. This list starts with the two loan schemes put up by the U.S government that allows you to buy a home with no down payment: USDA loans and VA loans.
Each loan has a very specific set of criteria you need to meet in order to qualify for a zero-down mortgage.
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#1 USDA Loans
A USDA loan sponsored by the United States Department of Agriculture. The USDA loans facilitate the U.S government’s plan to encourage development in rural and suburban areas. You can get a USDA loan with $0 down. USDA loans also have cheaper fees than other types of loans.
To qualify for the loan, you and the intended home have to meet a few criteria to qualify. Firstly, your home must be in a rural or suburban area. Check out the USDA’s map of eligible areas to find out if your home qualifies.
On this map, anywhere outside of an orange zone qualifies as a rural area. Secondly, your home cannot be a working farm, it must be a single-family unit and you must live in the home as your primary residence.
Additionally, you may need to meet a few financial requirements to qualify. The added gross income in your household cannot exceed 115% of the median income of the county your home is in.
Your debt-to-income ratio shouldn’t be above 45% and you must have a FICO score of at least 640.
#2 VA Loans
This government loan is open to an active-duty service member, member of the National Guard, veteran, or spouse of a fallen veteran. It is sponsored by the Department of Veteran Affairs. With VA loans, you can buy a house with no money down.
You can also pay a one-time VA funding fee that’s 2.15% of your loan value in lieu of mortgage insurance.
In order to pass for a VA loan, you must meet any one of the following service conditions:
- You must have served 90 consecutive days of active service during wartime.
- Spent over 181 consecutive days of active service during peacetime.
- Served for over 6 years in the National Guard or Reserves.
- Be the spouse of a service member who died in the line of duty or from a service-related disability
In addition to service requirements, you should have a credit score of at least 640 to get a VA loan.
#3 80/20 Combination Mortgages
This option is available only to borrowers who have amazing credit ratings. In this type of loan, you obtain two loans instead of one.
One of the loans accounts for 20 percent value of the house while the other covers 80 percent value of the intended house. Amazing, right?
The funds from the first loan serve as a down payment for the second. Typically, the smaller loan comes at a lower interest rate, while the bigger one may come at a higher rate or with an adjustable-rate mortgage.
The benefit of an 80/20 loan is that it enables you to buy a house with no money down while evading the need to pay PMI.
According to Barrett Barlowe of The Nest, “two loans are better than one, only if the terms of each are profitable.”
Therefore, it’s important that you review the terms of both loans to ensure that they are favorable before you agree to any kind of combination mortgage.
#4 Rent-to-Own Deals:
In a rent-to-own deal, you will really build up sufficient funds to make a significant down payment. Meanwhile, you can afford to live in the house while you save funds. To qualify, you must have a good credit score.
Before you enter such an agreement, you have to; go through the agreement terms, research the property, double-check the fine print and lastly choose the right terms.
In this type of agreement, you have to rent the house from the homeowner and pay an additional amount of money of about $100 to $200 each month intermittently.
The seller keeps this extra money in an escrow account. After a given amount of time, usually three to five years, you can now demand a mortgage and purchase the house. All the money in your escrow account will go toward your down payment.
This style has its own risks to consider. For instance, if you cannot or fail to buy the house at the end of the leasing period, you will be required to forfeit a specific amount if not all of the funds you have accrued toward the down payment to the seller.
To beat the trap of having to forfeit all the funds, it is always better to talk to a bank about financing before signing papers with the seller. You can also apply for a mortgage when the time comes to purchase the home.
#5 Buying a House On Contract
This type of deal can be a good idea for those who want to be homeowners but lack the funds for a sizeable down payment or cannot qualify for financing through a bank or mortgage company.
When you choose to buy a home on contract, the seller agrees to finance the purchase for you against going through a mortgage company.
Once you settle on a price, you make monthly payments to the homeowner, who retains the title to the property until you complete payment.
Some Real estate investors offer properties for contract sales. Most times, they will require a down payment, but some investors, such as John R. Lee, owner of Heartland Hideaways, LLC, will sometimes allow buyers to enter into a contract with little or no money down.
The reason these sellers afford to enter a contract with little or no down payment is that they continue to hold the deed until full payments are made.
So, if you falter on your monthly payments, they can have you evicted from the property and also hold your money.
This style poses some risks: However, a perfectly settled contract will always be a win-win for both parties.
#6 Conventional 97 (3% down)
The Conventional 97 program is available from Fannie Mae and Freddie Mac. It’s a 3 percent downpayment program and, for many homebuyers, it’s a less expensive option as compared to an FHA loan.
As the name implies, a Conventional 97 loan is a mortgage that grants you access to have a loan-to-value (LTV) ratio of as high as 97%. This means that if you’re buying a house with a $100,000 asking price, you can borrow up to $97,000 and will have just $3,000 to put down as your down payment.
Furthermore, the Conventional 97 mortgage accepts gifted funds as part of the 3 percent down payment, so long as the gifter is related by blood or marriage; or via legal guardianship or domestic partnership; or is a fiance/fiancee.
The Conventional 97 program does not enforce a specific minimum credit score beyond those for a typical conventional home loan. The program can refinance a home loan, too.
#7 FHA loans (3.5% down)
Federal Housing Administration (FHA) loan is a government-sponsored loan that you can access with as little as 3.5% down.
FHA loans have fewer requirements than USDA and VA loans. For these loans, you must plan to live in the property you’re buying as your primary residence, buy a home that meets livability standards, and move in within 60 days of closing.
It’s important to remember you’ll need to settle for mortgage insurance throughout the life of the loan if you have a down payment of less than 10%.
Some people get an FHA loan, wait until they build 20% equity in their property, and then refinance to a conventional loan as a workaround. This excludes the lifetime mortgage insurance requirement.
The FHA advertises a series of standards for the loans it will insure. Once a bank underwrites and funds a loan that satisfies the specific guidelines, the FHA agrees to insure that loan against loss.
The benefits of an FHA loan are:
- Your down payment may consist entirely from “gift funds”
- Your credit score requirement is 500.
- Mortgage insurance premiums are paid upfront at closing and monthly thereafter.
Last Words
Despite the high cost of houses in America, you can still afford to own a house without making down payments just by using any of the above loan or financing schemes. All you need to do is satisfy the requirements and then stick to the rules. Cheers!
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