Many people meet some aspects of the lending criteria, but lack the cash for down payment. How can you buy a house without giving 20% of the asking price upfront?
One of the most important financial investments you’ll ever make is the purchase of a home. There will be long-term impact on your credit and finances, so the decision has to be a sound one. Add to this the fact that most traditional mortgages require a 20% down payment, and the situation can bring anyone anxiety. Many people meet some aspects of the lending criteria, but lack the down payment. Are there any options to get into a house without shelling out 20% of the asking price up front? Read on to find out.
Obtaining a VA loan is one of the most popular ways for potential homeowners to purchase a home without a down payment. Qualified veterans and service members on active-duty as well as some members of the National Guard and Reserves may qualify to obtain a mortgage with no down payment. These loans are backed by the Department of Veterans Affairs, and charge the borrower a funding fee. Those in the military or veterans buying a home for the first time with no down payment pay a funding fee of 2.15%; the fee goes up to 2.4% for qualifiers in the National Guard or Reserves.
Navy Federal Loan
Another military related organization, the Navy Federal Credit Union, will provide 100% financing to qualified members. Potential borrowers include members of the military, certain civilian military and Department of Defense employees and their family members. The 1.75% funding fee for Navy Federal is lower than the fees charged by the VA.
The Department of Agriculture, another government organization, offers loans for potential home buyers hoping to avoid a down payment. Despite what it may seem, this program is not only for rural properties and farms. See where the closest loan approval office is on the USDA website. USDA loan requirements are for first-time home-buyers only and include some household income restrictions and decent borrower credit.
Credit Union Loan
Some credit unions offer no down payment financing to those who meet other loan criteria. Potential home owners should check with their individual credit union for no- or low-down payment financing options.
The Federal Housing Administration has offered home loans for those with less-than-perfect credit since 1934. Although they don’t make loans with no down payment, they require only a 3.5% down payment, which is more manageable for first-time home buyers and those with credit issues compared to the usual 20%.
Consider the Alternative
Before you go with one of the above options, consider this: there are benefits to putting down as much money as possible up-front when obtaining a home loan. Your monthly mortgage payment will be lower, and if you take out mortgage insurance, the more money you put down up front, the sooner your mortgage insurance payments will terminate.
One thing to keep in mind while seeking a no-money-down loan to buy a house is private mortgage insurance. When the down payment is less than the standard 20% of a home’s purchase price, private mortgage insurance kicks in to protect the lender in the event of default. Once a certain re-payment level has been reached, it will likely terminate, but this insurance can significantly increase monthly mortgage payments in the meantime. If you’re heading down the no-down-payment route, ensure whether the private mortgage insurance payments are factored into your monthly payments.
There are many paths to home ownership, and some don’t require a down payment. These are especially attractive to first-time home buyers and those with poor credit. As you research these options, be sure to secure the best loan rate for your situation, factoring in private mortgage insurance if it applies to your purchase. Be sure to establish a good working relationship with your real estate broker and representatives from lending institutions who will guide you toward sound financial decisions as you navigate the process of buying a new home.
*Source: Sharon Lee, Manager of Product and Content Marketing for Coldwell Banker Real Estate, LLC.