Editor’s note: This article is from Brandon Turner of BiggerPockets.com. These guys know their real estate. Even though it appears there are ways to buy a house without putting 20% down, you guys know I would say it’s wise to put that much down so that you are shielded from market downturns, PMI, etc.
The year was 2006. The real estate market was soaring, lending standards were loose, and even your pet iguana could get a loan.
In this era of impending doom, 100% mortgage loans were common place.
However, since the collapse of the lending market, no money down deals have almost entirely disappeared. Individuals are once again forced to save 20% or more to finance their home – making it difficult for millions of potential homeowners to get into a new home.
Despite the dramatic change in the lending world – there are still several loans in existence that you may qualify for to buy a home with no (or low) money down.
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1. Veteran’s Affairs Loans
Many banks and lending institutions offer a loan guaranteed by The US Department of Veterans Affairs that offers 100% financing (no money down) loans for those who have served in the United States Military or surviving spouses.
If you find yourself in this category, a “VA Loan” might be a great way to buy your next home. Keep in mind, however, that this loan is only for “owner occupant” home loans – meaning the home you are going to live in (sorry landlords!). See the Department of Veteran Affairs website for more information on VA Loans.
2. US Department of Agriculture Loans
If you are not in the VA, there is another less-well-known loan option you can look into that would require no money down, guaranteed by the United States Department of Agriculture. That’s right: Agriculture.
However – you do not need to be a farmer to get this loan. The USDA actual offers this product to anyone living in an area outside a major metropolitan area. In other words, if you don’t live within one of the major US Cities -there is a good chance you can qualify for this loan program.
Just like the VA program, the USDA loan is also only applicable for owner occupants. Additionally, you will need to fall under some maximum income requirements to take advantage of the USDA loan, which differs depending on the individual county you are buying in.
3. The Fannie Mae HomePath Loan
No doubt you’ve heard about the foreclosures that are everywhere -you probably can name a dozen houses in foreclosure that you drive by each and every day. Real estate investors are taking advantage of the low prices and finding great deals every day – and so can you.
Many of these homes are owned by the Federal National Mortgage Association (FNMA), or Fannie Mae – a government-sponsored enterprise that buys loans from many of the nation’s banks and other financial lenders in order to free up the working capital in these financial institutions.
In order to sell the homes they currently own, Fannie Mae created the HomePath Loan. While only applicable on the homes listed for sale by Fannie Mae, the HomePath loan offers financing for as little as 3% down and includes the ability to finance home repairs into the loan.
This means you can buy a home, include the cost of new paint, carpet, and a kitchen remodel, and pay just 3% of the total amount for a down payment. This can help you snag a great deal and immediately build a sizable amount of equity by improving the property.
HomePath also offers financing for real estate investors with just 10% down payment, so if you are interested in investing in real estate with little money down – this might be a great option for you. For more information on the HomePath loan, see www.Homepath.com
4. F.H.A. Loans
If you don’t meet the qualifications of either the VA, USDA, or HomePath loan, there is another loan product that may help you buy your first owner-occupant loan: the popular FHA loan. The FHA loan is a loan offered by many lending institutions and guaranteed by the US Department of Housing and Urban Development.
Like the HomePath loan, the FHA is not a $0 down loan but pretty close -requiring just 3.5% down, which means on a $100,000 purchase you will only need to come up with approximately $3,500 to make the deal happen.
The FHA loan comes with one other added benefit similar to the HomePath loan: the ability to finance repairs into the loan. Known as the 203K loan, this feature allows you to include items such as paint, carpet, remodeling, a new roof, or pretty much any “normal” home repair into your loan amount. As with the HomePath loan, this can help you build immediate equity.
While there are closing costs associated with any loan program, with any of these loan products you can ask the sellers to pay most (or all) of them for you – which can make your out-of-pocket expense even less.
The largest drawback to using the FHA loan is an added payment known as “private mortgage insurance” or PMI. PMI is essentially just “insurance” on the loan that can add anywhere from $50 to $200 to the cost of your monthly payment, depending on the size of the loan. Keep this in mind as you make your calculations and determine how much
5. Bonus Idea: Unison HomeBuyer
Through Unison’s HomeBuyer program you can receive up to half of your down payment in exchange for equity in the future growth of your home’s value. This program isn’t for everyone, so be sure to study the pros and cons in our full review to really understand what you’re getting into.
Should You Buy A Home with No (or Low) Money Down?
Perhaps I should have started the conversation with this question: Should you even buy a house with no money down? Using no money down loans are an excellent way to get into a home when you don’t have a large amount of money – or your money is tied up in other investments.
However -buying without any down payment, of course, means you won’t have any equity built into the property. If the market declines further – you could find yourself owing more on the home that it’s worth.
Be careful to do your research and don’t overspend (Check out the great article on PTMoney on “10 Things to Do Before You Make an Offer on a House.”
Prices, however, have been driven to rock bottom levels from the mass amount of selling, so many investors believe we are past the bottom of the real estate market and moving upward. As the great Oracle of Omaha has often said, to build wealth, simply “buy when everyone else is selling.”