How to buy a home with zero or little down

From 10/17/14

People looking to buy a mortgage without a down payment – or with little money down – do have options.

Anyone interested in buying a home should be familiar with one particular rite of passage: the down payment. Generally speaking, the more money you have to put down, the better your chances are of purchasing a mortgage.

But a large down payment – traditionally speaking, 20 percent of the home’s purchase price – isn’t necessary to buy a home. In fact, there are several options that make it possible to buy a home with zero or little money down.

Today’s no- and low-down payment programs typically are backed by the government or related agencies for homes that serve as the main dwellings for the purchasers, as opposed to investment properties, according to Marty Sievers, a mortgage consultant at Mountain West Financial in Lake Arrowhead, California.

Since the programs are insured by the government, they typically have more stability than privately run programs once aimed at high-risk borrowers, which contributed greatly to the housing crisis of the mid-2000’s, she explains.

So if you don’t have a large down payment saved up, keep reading to learn more about low down payment programs that could help make your homeownership dreams come true.

Option #1: FHA Loan

Are you having a hard time coming up with a large down payment for your first home? Then you might want to consider a low down payment mortgage backed by the Federal Housing Administration (FHA).

Designed for first-time home buyers, FHA loans offer easy credit qualifications, low closing costs, and low down payments, according to the U.S. Department of Housing and Urban Development (HUD).  Typically, FHA loans only require a 3.5 percent down payment.

In 2014, lenders have relaxed their credit score requirements, approving FHA mortgages for home buyers with scores at 600 and below, says Ken Bates, of San Diego-based Military Home Loans, a direct lender specializing in VA loans.

Another advantage is its less strict guidelines on the home buyer’s debt-to-income ratio, defined by HUD as “a comparison or ratio of gross income (before taxes) to housing and non-housing expenses.”

“FHA is more flexible with the debt-to-income ratio,” Sievers says. “Sometimes you can qualify for a loan [with a DTI] above 50 percent.”

But for the FHA to be more forgiving in that regard, applicants must have strong compensating factors, including steady income and cash reserves after the loan purchase, according to Bates.

Generally speaking, applicants for an FHA loan should not have a mortgage payment and non-housing debts that exceed 41 percent of their gross income, notes HUD.

The major drawbacks of the FHA loan program are the requisite upfront mortgage insurance premium and monthly mortgage insurance payments that last the life of the loan.

The premiums are based on a formula that factors in a payment rate that’s 1.35 percent of the mortgage value, says Bates.

The good news is that people can refinance out of an FHA loan and have the mortgage insurance dropped once their equity level reaches 20 percent of the home’s fair market value, Bates notes.

Option #2: VA Loan

People with military backgrounds who are in the market for a new home could meet their down payment needs with the loan program sponsored by the U.S. Department of Veterans Affairs (VA). According to Sievers, a VA Loan offers plenty of perks – most notably, no down payment.

“You just have to be a veteran, so it’s not for everybody,” Sievers says. “I don’t see any negatives with it and the 100 percent financing is very reasonable.”

More specifically, the VA loan program says its prospective homebuyers must be active service members, veterans, and eligible surviving spouses whose husbands or wives passed away due to service-related injuries.

According to Bates, VA loans are appealing, because it doesn’t require mortgage insurance, and they have lower interest rates compared to FHA and conventional loans.

He adds that active military personnel need 90 days of service or more during wartime, and for veterans with previous experience, age doesn’t matter, according to Bates. Military reservists or National Guard members must have six participating years of duty to qualify for VA home loans and other housing related programs sponsored by the agency, he notes.

“You can be a World War II veteran who is 92 and the VA can still help you get a loan, just like a 20-year-old,” Bates says.

The VA loan also might come in handy in the future as well, since the VA offers to help homeowners, Native American veterans, and disabled veterans with refinancing or making new purchases that can meet their specific needs.

Option #3: USDA Loan

If country living sounds like it might fit your lifestyle, there is a zero down payment option that could be right for you. Sponsored by the U.S. Department of Agriculture (USDA), the agency’s home loan program has a stated goal of improving the quality of life in rural areas while catering to people who might prefer owning a home in a rural setting.

But the main draw of the USDA loan is the zero down option, according to Sievers.

“If the property appraises for higher than the sale price, you can increase the loan amount to cover the closing costs,” she says. “You can’t do that with any other loans. So, if it sells for $100,000 and the appraisal comes in at $103,000, you can increase the loan amount to $103,000 to help pay for the closing costs – a huge perk.”

The USDA reports that properties must be located in eligible rural areas for homebuyers to be considered for its loan program. The other major stipulation is that household incomes must be within the program’s eligibility guidelines.

For example, Sievers says, a family of four in San Bernardino County, California, has an income limit of $77,000. The limits go up based on family size, she adds.

Option #4: Down Payment Assistance Programs

If you can’t rely on parents or relatives for help with your down payment, where else can you turn?

The answer might be found in down payment assistance programs, according to Ron Henderson, a mortgage broker and president of Multi Real Estate Services, Inc. of Canoga Park, California. He says such programs are ideally suited for people who can’t afford to put large amounts of money down on a home purchase.

Down payment assistance programs usually have low down payment requirements, but in order to be approved, you will need to meet certain guidelines in regards to your income and credit, says Henderson.

He notes that down payment assistance programs generally are funded by state and county agencies, so he advises people to check with housing agencies in areas where they want to purchase a home.

For example, in Henderson’s home state, the California Homebuyer’s Downpayment Assistance Program (CHDAP) says borrowers must be first-time homebuyers and meet certain income and sales price limits.

For example, income limits for a CHDAP first-time buyer with two people in the household range from $53,000 in smaller California counties such as Merced to nearly $95,000 in San Francisco. Sales price limits for homes range from about $250,000 to more than $800,000 depending on the county.

Another interesting facet of the program is that prospective homebuyers must complete an education course to help improve their chances of successful home ownership, the California Housing Finance Agency reports. The eight-hour online course costs $50, while the in-person course by HUD-approved housing counseling agencies varies.

Homebuyers also might want to consider county- or city-based down payment assistance programs. In DeKalb County, Georgia, the local down payment assistance program requires applicants to have a FICO credit score of at least 620, making them eligible for assistance up to $8,000 for down payments and other prepaid expenses.

But people with scores under 620 are still in luck with the DeKalb country program. Eligible applicants with scores under that mark can receive up to $5,000 in down payment help.



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