Are you itching to get out of your apartment or rental and into your own home? The problem many home buyers face is the lack of funds. While saving up for a down payment is always a great idea, there are some ways you can buy a house with little to no down payment.
No Down Payment Options
No money down. Sounds appealing, right? Well, there are going to to be reasons that lenders are allowing for no money down. It’s a good idea to weigh your options and consider the long-term costs as well as what you’ll be paying up front. Let's explore the no money down options.
Many think of farmland when they hear about USDA loans. That’s because USDA loans are mostly for homes in rural areas. Rural doesn’t have to mean a mile in between you and the neighbors, though! There are plenty of areas out there that qualify for USDA loans, and it’s worth checking out.
There are a few personal qualifications when getting this loan, however. You must be a lower-moderate income household. Your housing expenses cannot exceed 29% of your income level, and your total debt cannot exceed 41% of your income. Although this loan is primarily for first-time homebuyers, there are some exceptions. This loan only applies to single family homes, so keep that in mind when considering your loan options. One last thing to think about when considering this loan: the loan amount cannot exceed the appraised tax value of the property. So if you are in a tough market and prices are high, it may be more difficult for you to find an approved house.
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If you are in the military, a VA loan might be the right avenue for you. VA loans don’t require any down payment, although they do require a funding fee that is wrapped up into your loan. The fee amount decreases when the size of your down payment increases, and there is a way to pay it off early. VA loans do not require private mortgage insurance, and you are able to get a loan even if you have low credit. While other loans have limits on the number of times you are eligible, you can use a VA loan as many times as you need, as long as you only use it for your primary residence, not an investment property.
Navy Federal Credit Union
Similar to the VA loan, the Navy Federal Credit Union issues loans to those who have served or have parents who have served in the armed forces. They have many of the same requirements and perks as the VA loan, but the circle of eligibility is wider. If you are interested in this loan, check with your local Navy Federal Credit Union for more information.
Private Loan Option
If you don’t go with USDA loans, there is always private loan options. You can find a trusted family member or someone in your network to lend you the money for the down payment of your house. Often, this comes with some interest and specific terms, and you’ll need to have collateral, but it is an option worth considering.
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Lease to Own
If getting the approval of a lender is the issue, you may want to consider a lease to own option. In a lease to own agreement, you rent out a house and your rent goes toward the payment of the house. If at the end of an agreed amount of time you are still unable to purchase the house, then you move on. This is a great option for those looking for a great house that is not within their budget at this time. Because your landlord or seller becomes your lender, you can work out manageable terms that both parties can agree and keep.
If the property you are looking to buy is for investment purposes, you may consider a 1031 exchange. A 1031 exchange allows you to take an investment property you currently own, sell it, and use the equity as a down payment on a new investment property. The great thing about the 1031 exchange is that you don’t pay taxes on the sale of your property and you are able to get bigger and better properties in the exchange. While you are allowed to use the money from the sale of the property on the down payment, there are some things that you will have to budget for. Some of these items are the presale inspection, any repairs, and HOA dues/pro-rations.
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Low Down Payment Options
An FHA loan is great for those who have issues with conventional loans due to bad credit. People with credit scores in the 500 range can be approved. Another great feature of the FHA loan is that you can put down as low as 3.5% on your house. You can also have the closing costs wrapped into the loan amount or have the seller pay them, depending on the market you’re in and how well you can negotiate.
There are always caveats to great things, and an FHA loan is no different. You will need to get mortgage insurance on the property when you buy. The mortgage insurance stays attached for the life of the loan. While other affordable housing options don’t allow you to purchase investment properties, you can with FHA loans. Some FHA lenders approve rental properties up to four units, which is great news if you want to use the BRRR method to build your portfolio!
While most other loans go through banks, conventional loans go through Fannie Mae or Freddie Mac, which the federal government does not back up. Conventional loans reward larger down payments and great credit, but they can be used for lower down payments as well. In fact, the down payment percentage of a conventional loan rivals that of the FHA loan, at a minimum of 3% down. With down payments less than 20%, you will be required to get Private Mortgage Insurance, and the premium goes up as your down payment goes down.
Not shelling out a down payment or paying very little toward it sounds like a great plan initially, but it definitely isn’t necessary. Save money in the long run by working hard to save your down payment. If you need ideas on how to save for your down payment, we’ve got some creative strategies in mind for you.
Looking to buy a house that qualifies for low down payment loans? Look no further than Clever. Our agents at Clever are well-versed on the loan options in your area and can help you find a house to match your budget. In fact, your Clever agent may even give you money back, just for using them to buy your home! Call us today at 1-833-2-CLEVER or fill out our online form to get started.