Purchase Home with Low Down Payment

For many aspiring homeowners, arranging the necessary funds for the down payment can be the biggest hassle. In fact, most people wish to go for a zero- or minimal-down payment option, especially their first home.

This blog will examine how to get these mortgage offers to turn your homeownership dream into a reality without a hefty down payment. So, are you ready to find out? Let’s get started.

 

Is It Possible to Buy a Home with Low or No Down Payment?

Yes, buying a home with a low or no down payment is possible, especially if you are a first-time homebuyer. There are dedicated first-time homebuyer loan programs with zero down payment to make the homeownership journey easy and affordable.

FHA loans are typically the most popular loan type for people seeking minimal down payment, which is 3 to 3.5%. However, there are unique options for specific categories of people, like veterans, actively working in the military, or rural homebuyers from low- and moderate-income households that offer funding with zero down payment.

Besides, there are specific homebuyer assistance programs run by every state and funds offered as government grants. Some of these offer low or zero down payment.

 

Zero-Down Mortgage Explained

A zero-down mortgage is a home loan that is offered with zero down payment. This means you can finance 100% of your dream home’s value. These loans are offered by government agencies, like Department of Veterans Affairs (V.A.) or the U.S. Department of Agriculture (USDA). Since government departments guarantee the loans, lender's risks are minimal. 

 

Benefits Of Zero-Down Mortgages

• Get into your new home faster by skipping the wait to save up for a down payment.

• Enjoy financial flexibility by using your funds for other immediate needs.

• Look into potential nonprofit grants designed for first-time homebuyers.

• Larger loan amounts can lead to bigger mortgage interest deductions

 

Downside Of Zero-Down Mortgages

• Higher monthly payments because you didn’t make a down payment.

• Interest rates may be higher compared to loans with a down payment.

• Eligibility could be restricted by income and household limits, especially for HUD-affiliated programs.

• Some loans require you to complete a homebuyer education course.

• Limited initial equity might make you more sensitive to changes in the real estate market.

 

Buying A Home With A Low Or Zero-Down Mortgage

Arranging the down payment is the biggest stress for first-time home buyers. For most, this may seem impossible. Thankfully, there are government-backed mortgages that can be obtained with zero down payment. 

However, you need to strategize well to get maximum benefit from such loan programs. Here are some creative ways to buy your first home with a zero—or low-down mortgage.

 

1. Start by applying for a low or zero-down loan

Government-backed programs are the best choice if you are looking to buy a home with minimal or zero down payment.

Loans offered by the Department of Veteran Affairs, known as VA loans, and the U.S. Department of Agriculture, known as USDA loans, are two of the best zero-down mortgage programs. 

• VA Loans are aimed at veterans and in-service military members. They require zero down payment, and zero mortgage insurance.

• USDA loans are for home buyers who are interested in buying their first home in designated rural and sub-urban areas. It requires no down payment and your income must not be more than 115% of the AMI. 

 

2. To cover the down payment, use a first-time home buyer program 

In addition to the two federal programs mentioned above, there are different state-level programs for first-time home buyers that help them cover the down payment and closing costs. These programs are in the form of grants or low-interest loans.

Some programs can be used as a second mortgage along with the primary mortgage to help borrowers make down payments and cover their closing costs. For instance, the HomePath Ready Buyer program gives up to 3% assistance as closing costs. This applies to eligible home buyers for a Fannie Mae-owned home.

 

3. Ask a family member for a down payment gift 

You can request a down payment gift for any member of your family. This can make the task of buying a home less financially burdensome for you. You must arrange a gift letter from the donor and present it to the lender. The letter should state that the funds offered are not a loan but a gift. The letter should also highlight the relationship between you and the donor, along with the gift value and the complete address of the purchased property.

 

4. Lender Credits to pay your closing costs 

You can benefit by choosing lender credits that help you minimize the upfront closing costs. Remember, when you choose this strategy, you will bear a higher monthly interest rate. When the lender credits increase, the interest rate also increases.

Speak to your lender and negotiate with them so that the lender's credit is suitable according to your expectations. The benefit is that your initial cost is low; however, keep the long-term effect in mind when choosing this strategy.

 

5. Ask for seller concessions

In this case, you make the seller pay for the closing costs through seller concessions. You need to negotiate with the seller while discussing the home purchase agreement. The seller can agree to pay a certain percentage of the down payment amount. Remember, with this strategy, you may need to cover certain additional fees, such as property taxes, mortgage points, or attorney fees. 

While seller concessions can help reduce closing costs, they can vary depending on your mortgage type.

 

Which Home Buyer Loans Have Low or Zero Down Payment?

USDA loans

This loan offers 100% funds to qualified home buyers. The program is run by the U.S. Department of Agriculture and is offered to home buyers who are buying their first home in specified rural areas. The definition of 'rural' is broad and includes almost 97% of land in the U.S., including typical rural areas and suburban neighborhoods. 

The USDA's objective is to help low-to-moderate-income borrowers buy their first home. Some of the requirements are as follows -

• Eligible credit score is 640 or above.

• There is no down payment.

• Below 41% DTI (debt-to-income) ratio.

• Income less than 115% of the median income of the area.

• The borrower needs to have a stable employment for the past 2 years.

• The property must be the borrower's primary residence and should be a single-family home in a designated area.

Besides requiring no down payment, the USDA loan mortgage rates are pretty low. You will, however, be required to pay a funding fee initially, but you can finance it with your loan. An annual fee is also added to your monthly mortgage payment.

 

V.A. loans

The V.A. loan is also a no-down payment program offered to veterans, honorably discharged members, U.S. military officials, and surviving spouses. It is also available for members of the Reserves or National Guard who have served for at least 6 years. The U.S. Department of Veteran Affairs runs the program. The loan terms for borrowers are convenient. 

The requirements are as follows - 

• Eligibility certificate from the Department of Veteran Affairs.

• Zero down payment

• Below 41% as the debt-to-income ratio

• 2 years of employment

• The credit score should be 580-620.

• It should be your primary residence. It should be a 1- to 4-unit home.

There is no upper limit on the loan amount. There is zero ongoing mortgage insurance with lowered monthly payments. 

 

Doctor loans for physicians

This program is for medical professionals to help them buy their home amidst the financial burden of medical schooling.

• The doctor should be a practicing physician, fellow, or medical resident. 

• The credit score required is 700 or more. 

• New or resident doctors need to show their employment contracts.  

• In most cases, the down payment is about 5% or low or even zero, depending on the lender. 

• The home has to be the primary residence in most cases. Specific programs are also available for investment purposes for second homes or properties.

 

Conventional 97 loan program

In this program, borrowers must pay only a 3% down payment. Such programs are backed by Freddie Mac and Fannie Mae. The interest rates are competitive, too. The minimum credit score is 620, and the DTI ratio is 50% or lower. For down payments less than 20%, a private mortgage insurance must be paid until enough home equity is created. 

 

HomeReady loan program

This program is backed by Fannie Mae. It targets people from low-income groups and helps them buy their first home. The down payment is about 3%. The credit requirements are flexible, too. Borrowers should have an income that is 80% of AMI or lower. You can use other income sources like gifts or grants to fund your closing costs and down payment.

Other low- to zero-down payment mortgages include Home Possible loan programs, FHA loan program, Good Neighbor Next Door Program, and Piggybank loans. 

 

How to Find the Best No-Down-Payment Mortgage Lenders

Finding the best lenders for zero-down-payment mortgages involves two key steps:

1. Explore State and Local Programs: Look into first-time homebuyer programs available in your area.

2. Gather Quotes from Specialized Lenders: Seek quotes from lenders specializing in government-backed loans, such as VA and USDA loans.

Choosing the right lender is crucial, as it impacts your mortgage rates and overall home-buying experience.

What to Look for in a Lender

• Transparency: A good lender will clearly explain the loan terms, rates, and fees.

• Credibility: Check lender certifications and read reviews to gauge their reputation.

• Flexibility: Look for lenders with flexible criteria for credit scores, income limits, and loan customization.

• Customer Service: Excellent service is especially important for first-time buyers who may have many questions.

How to Compare Lenders

When comparing loan quotes, consider more than just the interest rate:

• Mortgage Interest Rates: Lower rates mean less overall cost, but zero-down loans might have higher rates.

• Loan Terms: Choose between 15, 20, or 30 years, which affects both monthly payments and total cost.

• Fees and Charges: Watch out for additional costs like origination fees and application fees.

• Monthly Payments: Ensure you understand your monthly obligations to manage your budget effectively.

Types of Lenders for Zero-Down Home Loans

• VA Loan Experts: Lenders like Veterans United and Navy Federal specialize in VA loans, offering favorable terms for veterans and active-duty service members.

• USDA Loan Providers: For rural properties, consider lenders such as PNC Bank and Fairway Independent Mortgage, who are experienced with USDA loans.

• Online Lenders: Leading mortgage lenders like Total Mortgage offer online applications and often better terms due to lower overhead.

• Credit Unions and Community Banks: These local institutions may offer favorable terms and personalized service for first-time buyers.

Thorough research and comparing multiple quotes will help you find the best lender for a zero-down-payment mortgage tailored to your needs.

 

Conclusion 

Thankfully, we live in a time when buying the first home is not that difficult. With readily available mortgage programs that come with low or zero down payment, you can fulfil your dream of owning a home. If you are ready to buy your first home and have no cash saved for closing costs and down payment, contact Total Mortgage for expert guidance and support.