8/9/2011 11:23 AM ET|
Buy a home without a down payment
You won't get a conventional loan (or even an FHA loan), but you might still be able to borrow the whole cost of a house. Here's where to look -- and what to consider before you do it.
Accumulating enough savings for a down payment, closing costs, moving costs and an extra cushion of emergency savings can be the most challenging aspect of buying a home. Renters who want the stability and pride of homeownership and the opportunity to build equity in a property are sometimes thwarted by the lack of cash even if they have excellent credit and a stable income.
Here's why: Even federally insured Federal Housing Association loans require a down payment of 3.5%. That may not sound like a lot, but on a $200,000 home, you would need $7,000 just for the down payment.
Zero-down-payment mortgage loans used to be popular when home values were rapidly rising and credit guidelines were looser. These days, almost no conventional loans are available without a down payment of at least 3% to 5% of the home price or more. However, some homebuyers may be able to qualify for a no-down-payment home loan through one of several programs.
The caveat is that borrowers must be able to provide documentation of adequate income to repay the loan and must have good credit -- at the very least a score of 620 or higher. Some lenders and loan programs will require a higher score.
Military families and veterans may qualify for a Veterans Affairs loan, which offers 100% financing. The VA loan program has been in place since World War II and is an insurance program that guarantees loans up to a certain limit. In most areas, that limit is $417,000, but the limit is higher in counties with more-expensive housing.
To apply for a VA loan, borrowers must obtain a certificate of eligibility from a VA eligibility center. After obtaining a COE, borrowers can work with any lender that offers VA loans.
VA loans not only do not require a down payment, but the mortgage insurance of 2.15 points (a point is equal to 1% of the loan amount) can be wrapped into the loan. Loan qualifications vary from lender to lender, but in general, VA loans require a debt-to-income ratio of about 41%.
USDA rural development housing loans
Some potential buyers who live in specifically designated regions of the country may qualify for a U.S. Department of Agriculture Rural Development housing loan. Although the loans are for "rural" areas, some eligible locations are actually near towns. Check the USDA eligibility page to find out if the area where you want to buy is a designated area.
Qualifying for a USDA home loan requires not only location eligibility but also conforming to income limitations. Borrowers can enter their ZIP code, income and number of household members here to find out if they meet the guidelines.
USDA loans are geared to low- and moderate-income households that have the income to afford the home payments but may be unable to save enough for a down payment. Minimum credit scores vary from lender to lender, anywhere from 600 to 640 or higher.
An upfront loan guarantee fee of 3.5% of the loan amount is required, but borrowers can wrap that fee into the loan balance to avoid the need for any cash at closing.
State and local homebuyer incentive programs
Nearly every state, county and local jurisdiction in the country offers some type of homebuyer incentive program. These programs sometimes offer down payment assistance, closing cost assistance or low-interest-rate home loans or a combination of those. While many are restricted to buyers by income level, some are not. Some, but not all, are restricted to first-time homebuyers. Many areas have programs designed to assist buyers in certain professions, such as teachers, medical personnel or first responders.
While not all these programs eliminate the need for a down payment, some offer a grant or an interest-free loan that will cover the entire down payment or a portion of it. The best way to find out about programs in your area is to search by state at the website of the National Council of State Housing Agencies.
The bottom line
Before you begin your search for a no-down-payment loan, be sure you can comfortably afford the payments associated with your home loan. Remember that if you do not make any down payment, you will have no equity in the property until you begin to pay off your mortgage or until the home rises in value. Be sure you won't need to sell the property for at least three years, because it will take at least that long -- or longer -- to build equity.
If you have been unable to save enough for a down payment, make sure you have savings in the bank to cover costs associated with homeownership. If you have no savings at all, wait. Until you have built an emergency savings fund, you should not consider taking on the responsibilities of homeownership.
This article was reported by Michele Lerner for Investopedia.
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$0 down didn't cause the housing market to crash. Sub-prime loans did. Sub-prime loans were fed by people's greed and their desire to have MORE MORE MORE. People bit off more than they can chew... period. They wanted bigger and better houses. They wanted new houses, not houses that were built 30-50 years ago. They bought brand new houses with ARMs and had their taxes and insurance worked into escrow.
Then what happened was their property was assessed and they now had taxes to pay. Their mortgage payments shot up along with their rate. Pretty soon, they couldn't afford their house payments and then they walked away from these houses.
These houses now sit empty. Banks don't want to lend money to anyone, especially if your balance on those credit cards are more than 50% of the limit. So, do you want them to remain empty or do you want people to buy them?
Rural Housing has income guidelines that must be met, along with a very strict underwriting process. Some of you need to realize that lower credit scores don't indicate that people are irresponsible with their money or that the don't pay their bills. It measures your ability to handle DEBT. The more revolving credit you have, the better chance you have of improving your credit score.
We bought a house via Rural Housing. No, I didn't have a down payment, however; "I" CAN afford my house payments AND the rest of the bills. The income my husband brings in goes into home improvements, extra mortgage payments... but most importantly- THE SAVINGS ACCOUNT. You see, we based what we could afford on MY INCOME ALONE. I make less than he does. We wanted to be sure that in case something happened to his job, we could make it on my income alone... and I don't make as much as you think.
It's a 1662 sq ft brick ranch built in 1978. Definitely not fancy by any stretch of the imagination. It's much smaller and much more modest than a lot of the houses that belong to our peers, however; its a decent sturdy house that was well built.
So whatever program helps the average, hard-working American that has dreams of owning a home (within their means), I accept. Perhaps that will help the economy get going a little. Nothing else seems to be working!
Footballmom, many of these people want to blame the housing crisis on no down payment
programs. The real fault is that people bought houses they could never pay for no matter how much they paid down and banks allowed them. Many people got upside down on their house and just quit paying, there have been many reports on this. I family pays 30K down on a $300k house pay on it for a short time and wake up a find the house is now worth $150k. They decide it makes more sense to lose their down payment than continue paying for it. Yes some downpayment loans were defaulted, but the real problem was buying more than they could afford not the no downpayment.
I agree with Rainy day. Far too many people are trying to keep up with the rich by buying things they cant afford. In the end they only look like idiots when they lose them. Priorities should change or we will fail as a country.
Owning a home is not all that it is cracked up to be. There is never any end to the up keep and keeping a home in good repair over and above mortgage payments. Most people buy way to much house just to be better or keep up with the Jones'. How we view the American dream has become very distorted! We have become conditioned to try to live way beyond our means as the prices of homes in the last 10 years have become absolutely outrageous!! Wages have not risen to keep up with these crazy prices. It's only corrupt mortgaging practices and greed that have sucked us into that dillusional way of life. I don't think down payment is the issue.... it is people buying more home than what their wallet can realistically afford. What's wrong with owning a smaller energy efficient and affordable home ?! We need to change our perspective and happiness factor in this country! In other words, how rich does rich have to be?!
I'm not sure where some of you live but the housing collapse has caused the rental prices to sky-rocket. It makes more sense to get into a zero-down house instead of paying a slumlord more than the price of a monthly mortgage payment. The advantages are clear...you get to do what you want to the place, you don't have a LL kicking you out after the lease is up so he can make more money in deposits...plus you get some piece of mind knowing your hard work is paying off. Rental's make sense for some but when you break it down the headache's are not worth it.
I got my Zero-down via USDA.. It was the best choice I ever made. Plus it got me out of the city which can eat away at your soul.
most of you are correct; skin in the game is essential. However the real key is realistic budgets and conservative underwriting standards. Those of you that say analyze your own budget and make realistic decisions on affordability are correct. I may be giving away my age, but I am not all that old-not even close to 60. When I was a kid and later a young adult it was not easy to get a home loan. It was not difficult either. The lending institutions keep your desires under control limiting your ability to spend. How? though reasonable lending guidelines.
The maximum your house payment could be; including taxes, insurance and association dues if they existed was 25% of your gross income. Your total debt could not exceed 33% of your income. By total debt I mean your new house payment, and all other installment or revolving credit such as auto loans and credit cards. Now before screaming how could people afford homes, they did very nicely; thank you. FHA existed back then as well as the VA loans, these loans also had a very low foreclosure rate. Adjustable rate mortgages did not exist at that time.
I know many of you are thinking that buying a home then must of been for the very well heeled but not so. A short lesson in economics please...... Remember price is determined by availability, demand and what the buyer is able to pay. Notice I said able to pay not willing. You may be willing to pay more but if you can't get the financing you won't make the purchase. One of the reasons for the housing bubble were the low interest rates. It gave the buyer the ability to buy more, since the buyer had an ability to spend more the seller (home builders) raised their prices, quickly. Since the buyer had the ability to pay more the demand became stronger, since demand was stronger the prices were increased because the number of persons able to purchase the home increased. Thus the supply and demand curve.
I will guarantee you that if during the bubble if the "old" underwriting stands had been adhered to prices would never of climbed to the level they did. Because consumer behavior (demand) would have been limited by the financing guidelines. I think we all income that 100% financing stated income loans were the most stupid thing that ever happened, I won't even discuss that moronic investment scheme.
Folks get real! No down payments did not cause the housing crash...it was the loan for a home that cost $100,000 that is now worth $50,000 caused it. Why pay on a loan for anything
worth half of what it cost you? Not logical. You pay a price for an item based on what it is worth (plus interest etc for financing). If an item is worth $100 would you pay $200 for it? People walked because they were not gaining value on their investment and could not recover from the loss within reason.
What the author said about FHA loans isn't exactly true. FHA loans will allow for zero down loans. Some acceptable sources of down payment: a gift from a family member, union, church, employer, or non-profit agency. Here in Idaho, we have Idaho Housing and they will grant the down payment to eligible first time home buyers. Moreover, there are grants available from the NSP program. Most states have non profits that can help with your down payment.
Point is, if you're needing a zero down loan, don't rely on what you read on the net. Call your local mortgage professional for the whole story.
Same here, Sharpsone. If I tried to rent a 3 bedroom house or apartment around here, I'd be paying about $300 more a month. It's been much easier to save money now that I'm a homeowner.
I think most of these comments I have read are made by a bunch of assuming, ignorant people. You see 0 down and make all the worst assumptions. I think you should all shut it, research the type of 0 down loans they are talking about and then make educated comments.
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