14 Dec

By: Betty White December 14, 2020 

Not enough cash for a down payment? The misconception that 20% down is necessary to buy your first home often discourage people from first-time homeownership. However, it is possible to purchase a house with the help of loans, cash gifts, assistance programs and even co-signers and co-borrowers. 

Homeownership is still a dream for many, but only because they're not aware of the existence of zero-down-payment home loans, low-down-payment home loans, and first-time homebuyer down payment assistance programs. The only costs a first-time homebuyer may need to cover are standard closing costs. And even those you can split with the seller, depending on the state of the market. About zero or no-down-payment loans or mortgages The money required to close the homebuying deal is a so-called down payment and is normally paid in cash. This cash can be difficult to obtain, especially for young, first-time homebuyers. However, there are zero-down-payment mortgages that transfer all the risk of default to the lender and relieve the homebuyer. However, this is precisely why these 100% financing loans are not that easy to find or qualify for. Pros and cons of zero down payment mortgage Perhaps you weren't aware, but there are several advantages of no-down-payment mortgages: 

  • With this kind of mortgage, you can become a first-time homeowner much sooner than you thought possible.
  • You are eligible simply because you are a first-time homebuyer.
  • For example, USDA loans or rural Housing Loans are not meant only for rural areas. According to USA Home Financing, even the suburbs of big cities such as Denver can meet eligibility standards. This is good as it doesn't affect the budget carefully planned for your Colorado move or your savings.

 However, keep the following things in mind if you're about to apply for a no-down-payment mortgage: 

  • You will have to cover private mortgage insurance or PMI for as long as you're paying off the no-down-payment loan.
  • Your monthly loan payments will be higher simply because you're initially borrowing more.
  • You may not be equally competitive in a multi-bid situation with buyers who can provide a higher down payment.

 With all this in mind, you can choose which one of the following financing options suits you better. USDA mortgage As stated above, USDA loans are generally intended to develop rural areas; however, other regions may be eligible too. Before dismissing this 0%-down loan, check if the house you plan to buy is located in an eligible area. Bear in mind that the minimum credit score for the USDA mortgage is 640 and that the loan has an income limit. VA home loan U.S. Department of Veterans Affairs (VA) provides a VA home loan to active-duty service members, veterans, honorably discharged service personnel, and surviving spouses. This no-down-payment loan doesn't require PMI, making a monthly payment lower. Also, it usually accepts a credit score of 620 and higher. Low-down-payment home loans These are the next best thing if you don't qualify for the zero-down-payment mortgage. Depending on the percentage of home value you need to pay as a down payment, the most interesting loans are: 

  • The HomeReady™ and Home Possible™ Mortgage – 3% down payment
  • FHA loan – 3.5% down payment
  • 80/10/10 or "Piggyback" Loan – 10% down payment

The HomeReady™ and Home Possible™ Mortgage The HomeReady and Home Possible loans are forms of 97 LTV (Loan-To-Value), similar in the fact that both require only a 3% down payment, allow co-borrowers who don’t live in the home, but require that your income is at or below 80% of the area median income. If you want to be eligible for Fannie Mae's HomeReady mortgage, your credit score must equal at least 620. On the other hand, Freddie Mac's Home Possible loans require a minimum credit score between 660 and 680, depending on whether the mortgage is fixed-rate or adjustable-rate. 

FHA loan The Federal Housing Administration (FHA) doesn't really provide the FHA loan - it insures it, so a lender is covered against loss. While its down payment is slightly higher than a conventional 97 LTV home loan, the FHA loan compensates for it with relaxed qualifying restrictions. Namely, 3.5% down is available to borrowers with credit scores equal and above 580; credit scores that fall between 500 and 579 require a 10% down payment. The good things about this loan are that it doesn't propose any income limits and allows down payments made entirely of financial gifts. It is worth noting that mortgage insurance often turns away borrowers from the FHA loan. This is mostly because the loan requires an upfront mortgage insurance fee and an annual mortgage insurance fee. Furthermore, FHA loans require that you pay mortgage insurance for the life of the loan, unlike conventional loans where you're free from mortgage insurance once you build 20% equity. A way to bypass paying mortgage insurance is by refinancing to a conventional loan when the right time comes. 

Piggyback loans The 80/10/10 loans owe their popular name, "piggyback" loans, to their structure. The "80" corresponds to the percentage of the home price you are borrowing. The first "10" corresponds to the second mortgage that "piggybacks" on the first and can be either a home equity line of credit (HELOC) or home equity loan (HELOAN). While HELOAN are fixed-rate loans, HELOC are adjustable-rate home loans and thus more flexible and popular. The remaining "10" is your down payment percentage. Moreover, when you're about to buy your first home, you can arrange for a more suitable loan structure. If you prefer a 75/15/10 ratio, lenders will likely agree to it. This is especially practical if you plan to purchase a condo because condo mortgages with 75% Loan-To-Value get better rates. 

Down payment assistance (DPA) programs and specialized mortgage programs Just as the name implies, down payment assistance (DPA) assists homebuyers by providing a grant that lowers (or offsets) their down payment. The qualifications for DPA differ, but they are all intended for first-time homeowners with low or moderate income, often in a specific area. Specialized mortgage programs aim to provide down payment assistance to particular professions. You should definitely take time to explore these mortgage programs, which can be provided locally and nationally. 

After a bit of research, you will be able to buy your first home with little or no money. Moreover, making important decisions such as investing in real estate during the current turbulent times is a task you shouldn’t take lightly. Therefore, make sure the decision you are making is an informed one.

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