How to buy a home without a down payment


Despite last year’s overheated and competitive housing market, fewer homebuyers have opted for these types of loans. In January, 9% of loans that closed were FHA-backed, 5% were VA-backed and 84% were conventional, according to ICE Mortgage Technology. The year before, in January 2020, 16% were FHA, 8% were VA, and 71% were conventional.

For those who qualify, these products can make the difference in whether or not they can become homeowners.

“The goal of all of these programs is to help people get a home, knowing that home ownership is a key factor in eliminating the divide of wealth,” said Ed Barry, CEO of Capital Bank, a bank with Headquartered in Rockville, Maryland, it operates Capital Home Bank Loans. “These programs exist, but many people don’t even know they qualify.”

For example, you don’t have to be a farmer to get a USDA loan. A fee that may alienate some veterans from a VA loan does not apply to disabled veterans. And while many people with poor credit may think they can’t get a mortgage, borrowers with credit scores as low as 500 are eligible for FHA loans.

Here’s what you need to know about government-backed loans:

FHA loan

It is easier to qualify for an FHA loan than it is for a conventional mortgage. Borrowers can borrow with lower credit scores, higher income and debt ratios, and smaller down payments.

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You can qualify for an FHA loan with a score of 580 and a down payment of just 3.5%. With a credit score like 500, a borrower will have to deposit more money. Those guidelines are set by the FHA, and individual FHA-approved lenders may impose different requirements, including higher credit scores.

Regardless of your credit score or size of your down payment, there are limits to the amount you can borrow from an FHA loan. Those limits range from $ 356,362 to $ 822,375 for 2021 and are determined by your location. You can find the boundary in your area on the Department of Housing and Urban Development website.

For many people, the low down payment on an FHA-backed loan isn’t the biggest draw, as some conventional loans already allow as little as 3% down. The big advantage is that you can qualify for the loan with a lower credit score and a higher debt-to-income ratio.

“But those things aren’t always in the best interest of the buyer,” said Jordan Nietzel, certified financial planner and founder of Trek Wealth Planning in Kansas City. “You can get over your head.”

He said the lowest rate you could get on an FHA loan could be outweighed by the insurance you will have to pay for the life of the loan.

While the private mortgage insurance required for conventional loan borrowers who deposit less than 20% disappears when the homeowner obtains a certain amount of principal, mortgage insurance is required for all FHA loans for longer periods, regardless of value. of the house.

Borrowers with an FHA loan and a down payment of less than 10% will pay for FHA mortgage insurance during the term of the loan. Those who deposit 10% or more will pay for the insurance for 11 years with a 30-year mortgage.

He said that depending on what your credit score is, it may make more sense to take the time to improve your score and get a more conventional loan.

“If you want to see the big picture, make sure you’re ready,” Nietzel said. “Don’t let the fact that you can get a loan without a 20% down payment and your current credit score be the reason for doing so.”

VA loans

VA loans are only available to veterans, with a few exceptions, such as the surviving spouses of veterans.
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Borrowers will still need the necessary credit and income for the loan, but a VA loan can offer better terms than a conventional loan, including 100% financing.

“The advantage of the VA loan is the option of not making a down payment,” said Nietzel. “What people need to be aware of is the debt-to-income ratio, which can be higher on a VA loan than on a conventional loan. It may qualify you for a higher loan than you could be prepared to handle. ”

The deciding factor for some veterans is the VA financing fee, which can be as high as 2.3% of the amount borrowed when the down payment is less than 5% and down from there for larger down payments.

For example, if you are taking out a VA-backed loan and you are buying a $ 200,000 home with a 5% down payment of $ 10,000, you will pay a fee of $ 3,135, or 1.65% of the loan amount of $ 190,000. The rate does not apply to individuals with a service-connected disability.

But often a lower interest rate on a VA loan will offset the VA financing fee, Nietzel said.

USDA Loans

The USDA loan program offers 100% financing, requires no down payment, and helps low- and moderate-income households shop in rural areas.

To be eligible, the buyer’s household income must not exceed 115% of the local area median income and they must purchase a primary residence.
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Additionally, there are eligibility requirements for the property, determined by population density. Buyers can search for eligible areas on the USDA website.

“People tend to think that a USDA loan is for farmers,” Barry said. “That’s not the case. It’s designed for rural shopping. But that’s defined by population density, not agricultural use. So it has eligible areas even 30 miles from Washington DC.”

He said he has seen people use these loans to buy an affordable home further out of town.

If the borrower and the property are eligible, a USDA loan could be a path to home ownership for those struggling to make a down payment or whose credit score is too low to qualify for a traditional mortgage.

Barry’s advice to anyone looking for any of these government-backed loans is to look for a lender who has a proven track record in handling these programs, as the application process can be more complicated than conventional mortgages.

“The challenge is finding someone who is knowledgeable in this space,” Barry said. Not only about the type of loan, but about the areas in which you are looking. “Usually this is more than a simple transaction. It can be a very complicated process. A little hand goes a long way.”

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