Have you always assumed that it’s impossible to make the jump from renter to homeowner without putting down a healthy chunk of cash? Think again. Not only can you buy a house without a sizable down payment, but you can actually secure a home loan without using a down payment at all. To learn how to buy a house with no down payment, keep reading.
How to Buy a House with No Down Payment
A down payment is a payment made in cash at the beginning of the purchase of an expensive item or service. Generally, the down payment is identified as a percentage of the total purchase price, and the remainder of the cost is financed.
When it comes to buying a house, most people assume that it’s necessary to provide a 20 percent down payment. This is false, however. Amassing that much cash is an incredible challenge for lots of people, so the persistent notion that a down payment of 20 percent is a necessity fools some would-be homeowners into believing that their dream is out of reach. Thankfully, you don’t need a down payment of 20 percent to buy a house. In fact, there are several ways to buy a house without a down payment.
A VA Home Loan
VA home loans are not handed out by the U.S. Department of Veterans Affairs (VA). Instead, these loans are originated by private lenders and guaranteed in part by the VA. Since this government backing reduces lenders’ risk, they are able to offer borrowers who choose this popular form of financing favorable terms, including 100 percent financing as long as the property’s sale price doesn’t exceed its appraised value.
As if the lack of a down payment requirement wasn’t attractive enough, VA loans also come with competitive interest rates, limited closing costs, no prepayment penalties, and no requirements for mortgage insurance. While VA loans can be a great way to buy a house with no down payment, there are some restrictions. For starters, these loans are only available to a select group; service members, veterans, spouses, and other individuals who have earned this housing benefit through their service to their country are eligible. In addition, a VA loan can only be used to finance the purchase of a primary residence. If you’re hoping to purchase a rental or commercial property, this isn’t an option.
A USDA Loan
Much like VA loans, USDA loans are created by private lenders and guaranteed by a government entity. They also require no down payment. When people hear that these loans are backed by the backed by the U.S. Department of Agriculture (USDA) and that geography is a factor in eligibility, they tend to assume USDA loans are limited to farms and rural communities. In actuality, while urban areas may not qualify, properties in many suburban and rural communities are eligible for purchase with a USDA loan.
There are limitations of which aspiring borrowers need to be aware, however. For starters, there are limits on a borrower’s income. USDA loans are designed to help low- and moderate-income borrowers become homeowners, so the limit is 115 percent of your area’s median income. There are also restrictions on the size of the loan, which depend on the area’s property values and vary from county to county. If you’re hoping to purchase a high-end estate, this form of financing is unlikely to meet your needs, but if your goal is to secure a moderate home in the suburbs or countryside with no down payment, a USDA loan might be ideal.
When exploring how to buy a house with no down payment, looking for a mortgage that doesn’t require a down payment is a good strategy, but it’s not your only option. Another route to consider is finding funds from outside sources that you can use to make a down payment. If your bank account isn’t up to the challenge of producing a down payment, you may be able to use gift funds instead.
What do you need to know about using gift funds? When using gift funds for a down payment, those funds generally must come from a family member or an acceptable organization (source). Lenders will not condone gifts from interested parties like a mortgage broker, real estate agent, or seller – or loans that are disguised as gifts. To ensure that gift funds are appropriate, lenders expect them to be documented, so be ready to show your lender a paper trail if you plan to use gift funds to make a down payment.
Down Payment Assistance Programs*
If you lack the funds for a down payment and no financial gifts are on the horizon, down payment assistance programs may be a solution to your dilemma. According to Realtor.com, there are more than 2,000 down payment assistance programs operating nationwide.
Do you have more questions about how to buy a house with no down payment? PrimeLending Kansas City has the answers you need. We believe home loans should be simple. That’s why we offer straightforward guidance and personal attention. Contact us today to discuss your path to homeownership.
*Certain restrictions apply. Not available in all areas. Please contact your PrimeLending loan officer for more details.