Buying a house in 2022 may be closer than you think.
If you’ve been wanting to buy a house but you have no money for a down payment, there are options for you. One of the most dangerous myths about buying a house is that you need to have 20% or more saved for a down payment.
With the average home price just under $375,000 in the United States, using a low or no down payment program will be key. I mean who has $75,000 just laying around? Not many.
Thirty-eight percent of home buyers say that saving for a down payment is their biggest obstacle when it comes to buying a house. Thankfully, you don’t need $75,000 for a down payment, and if you qualify you may not need a single dollar!
Can You Buy a House with no down payment?
This is the million-dollar (or $75,000) question isn’t it? The truth is there are a few different loan programs that do not require you to have any money for a down payment. There are also options that allow you to get a down payment from a gift or grant program. Let’s talk about the top 3 programs that will allow you to buy a house with no money.
Top 3 First-Time Homebuyer Programs with No Down Payment
USDA Rural Development
The USDA Rural Development loan is one of our favorite loan programs. It offers an awesome opportunity for potential homebuyers to own a home with $0 down.
While you might think that getting a USDA loan will require you to live away from other humans, they are actually pretty liberal with the word “rural”.
Generally, if you live in a town or suburb that has less than 35,000 it will qualify for the USDA Rural Development Loan.
USDA Rural Development Loan Requirements
- Purchase a home in an eligible area
- 580 or higher credit score*
- Have eligible income
- Make less than 115% of your area’s median income
- Be a primary residence
* One note about credit scores is that the USDA doesn’t have a minimum credit score requirement but most lenders only offer them for scores 620 or higher. Any score under a 640 will also need to meet manual underwriting requirements.
Benefits of USDA Rural Development Loans
- No down payment required
- You can roll closing costs into the loan if it over appraises
- The seller can contribute up to 6% of the purchase price in closing costs
- Lower mortgage insurance premium
VA Loan
The VA loan is the best loan program offered in America. If you are a veteran or an active-duty military member, you need to look at this program.
This loan program is the only loan program offered where the borrower has earned the right to use the program. The VA does still have credit and income requirements in order to qualify but it’s much more flexible than other programs.
VA Loan Requirements
- No Credit Score requirements
- Must be an eligible veteran or active duty member
- Must have consistent qualified income
- The home must meet VA property standards
VA Loan Benefits:
- No down payment required
- No private mortgage insurance (PMI)
- The seller can pay up to 4% of the purchase price towards closing costs
- Low-Interest Rates
As you can see if you are eligible, the VA Loan is a great program for active duty and veterans. If you have eligibility you should look at VA loans over any other loan program.
Down Payment Assistance
The next way you can purchase a home without needing a down payment of your own is to use Down Payment Assistance.
Down Payment Assistance programs come in many different formats. There are programs that are offered by your city or state, there are private programs and there are even programs offered by some lenders.
Down payment assistance programs work by giving you a percentage of your purchase price back as a gift or grant. Most down payment assistance programs will provide you with two to six percent of your purchase price back as a grant.
Not all down payment assistance programs are created equally, so make sure you know the ins and outs of the program before moving forward.
Things to know about down payment assistance programs:
- You make have to get a second mortgage
- Your interest rate may be higher
- The program could run out of funds quickly
- It could take longer to close your loan than other programs
- You need to meet income restriction requirements
These programs can be beneficial to you if you meet the requirements, can afford the higher payment, or don’t plan to move out of the home before the second mortgage is forgiven.
There are also low down payment loan programs that you can look into if you don’t qualify for any of the no money down/ no down payment programs.
The benefit of providing at least a small down payment is that the programs are a little more flexible and open to more people.
The Best 3 Low Down Payment Loan Programs
FHA Loans
FHA Loans are one of the most flexible mortgage programs available. Originally created to spark homeownership in America, this program makes it easy to buy a home.
Many people believe you need to be a first-time homebuyer in order to qualify for FHA but that’s not true.
FHA Loan Requirements:
- Credit Score of at least 500 w/ at least 10% down payment
- Credit score of 580 or higher w/ 3.5% down payment
- Purchase a primary residence
- Have consistent qualifying income
- Purchase a home that’s “move-in ready”
- Get a loan under the loan limit
Benefits of FHA Loans:
- Flexible credit requirements
- Low down payment
- Seller can cover up to 6% of the purchase price in closing costs
- Gift funds accepted
Overall FHA is a great program that offers a low down payment, very flexible credit guidelines, and below-market interest rates. Also, unlike other loan programs on our list, there is no maximum income limit for FHA.
Home Ready & Home Possible
Let’s discuss the last two options together as the programs are very similar. Home Ready and Home Possible are both conventional loan programs that offer low down payments and reduced monthly payments.
These loan programs are known as affordable mortgage options because they are designed to help credit-worthy borrowers with low incomes purchase a home.
Home Ready & Home Possible Requirements:
- Credit Score of 620 or Higher*
- 3% Minimum Down Payment
- DTI under 50%
- Earn less than 80% of the Area Median Income Limit
Benefits of the Affordable Mortgage Loans:
- Reduced private mortgage insurance
- Lower down payment requirements
- Lower interest rates
- PMI can be removed at 80% LTB
These loan programs offer a great opportunity for lower-income homebuyers who have good credit. While the minimum credit score required is only 620, you’ll find this option less appealing if your scores are under 680.
For borrowers who have high credit scores, this program will compete with FHA plus give you the option of removing PMI once you reach 80 Loan to Value.
How to use Gift Funds to Buy a House
Each of these loan programs we’ve mentioned will allow you to receive gift funds. If you have a family member, employer, charitable organization, or sometimes even a close friend who is willing to give you money to purchase a home, you can use these programs.
Gift funds can be a great option that will allow you to buy a house when you possibly otherwise could not.
Common Gift Fund Mistakes to Avoid
Getting a Gift That’s Not Really A Gift
Many homebuyers get a loan or borrow money from family or friends. This can harm your loan approval because it must truly be a gift in order to be used.
The donor of the gift funds will need to sign a letter stating that the money you received is a gift, there is no expectation of repayment and they will have to prove they had the money.
Not Preparing Your Gift Donor
When a donor agrees to provide you with a gift for a mortgage, there are a few documents the lender will need. One we previously mentioned was the gift letter which assures the lender the funds are actually a gift.
The second is bank statements from the donor. More than any other thing we request, this is the one that causes the most issues. Gift donors don’t typically want your lender snooping around their bank statements.
However, they are required in order to use the funds from the donor. We have to get a 30-day bank statement that shows the donor had the funds, and must also show those funds leaving their account. If the funds were in cash you will not be able to use them.
Paper trails are important due to anti-money laundering laws that all mortgage lenders must follow
PMI can save you money
Now maybe your uncle who’s bought 20 homes in his life or your friend or some person on Tik Tok has told you to avoid PMI at all costs. You hear this a lot from so-called financial gurus and other “influencers” trying to give you the 411 on home buying.
But before we throw PMI out with the bath water, is that good advice?
PMI better known as private mortgage insurance is a type of insurance that protects the lender in case you don’t pay the mortgage. Now I know that you probably hate paying for insurance as much as the next person, but could this be a good thing?
It is.
If you didn’t have PMI, the bank would have no protection in the event you stop paying the mortgage
If they have to foreclose on the house, fix it, and list it back on the market, and you put nothing down, the bank loses money.
With PMI, the bank is going to get between 20 to 25% from the insurance company in the event you default on the mortgage. Without this benefit, you’d need a 20% minimum down payment to purchase a home.
So why not just save 20% and avoid PMI?
Simple. The Cost of Waiting. As I write this in June of 2022, home prices have continued to increase, mortgage rates are rising to levels not seen in the last 10 years and EVERYTHING is more expensive.
If it takes you even 2-3 additional years to save up 20% that’s missed equity you could have been building in your house, not to mention the thousands of dollars per month you are lighting on fire paying rent. No money down programs and low money down help you to buy a house faster.
Low or No Money Down Helps You Avoid Being House Poor
Another reason not to put 20% or more down is so you don’t deplete your savings. One of the biggest mistakes you can make as a first-time home buyer is spending all of your saved money on just getting the mortgage on your house.
There will be a host of new expenses you are going to have once you have your own slice of the American dream.
- Current or future repairs
- New Furniture
- New utility deposits
- Routine maintenance costs
You need to consider these things when purchasing your home so that you can leave yourself some cushion both in your savings account and in your monthly payment.
After all, no one wants to be “house poor” – When all you can do is work to pay your mortgage and you don’t get to do anything fun.
As you’ve seen there are many options available to you to buy a house with no money. Don’t buy into the myth that you need 20% down to buy a house. Maybe 2022 is the year you can tell your landlord goodbye ( or mom’s basement) and finally own a home of your own.
If you want help understanding your loan options you can set up a time to talk to a mortgage expert here:
