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If you’re like most people, the one thing that holds you back from buying a house is the down payment. The 20% down payment myth makes most people think they can’t afford to buy a home without the large down payment. On a $200,000 home, you’d need $40,000 down if 20% is required, which isn’t feasible for many people.
The good news is though, you can buy a house with no money. Here’s how.
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Loans to Buy a House With No Money
Most people only know the standard conventional loan and its 20% down payment myth. What if you could find other financing options without the 20% down payment and even no down payment requirement? There’s even a conventional loan option without the 20% down payment requirement.
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If you are a low-to-moderate income household and you don’t mind living in a rural area, USDA financing may be a good option. The USDA loan is a government-backed loan with flexible underwriting guidelines and low-interest rates/closing costs.
To qualify, you need at least a 640 credit score and proof that you don’t make ‘too much money.’ Use this tool to see if you’re eligible and to see if the property you want is within a rural area.
To use USDA financing with no down payment, you must also prove you’ll live in the property as your primary residence and you don’t own any other properties.
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If you’re a veteran of the military or you are married to a veteran who lost his/her life in the line of duty, you may be eligible for a VA loan. Like the USDA loan, the VA loan doesn’t require a down payment, you can borrow 100% of the sales price.
To qualify, you need at least a 620 credit score and proof of eligibility for VA benefits. If you served at least 181 days during peacetime or 90 days during wartime and have a discharge other than dishonorable, you’re likely eligible.
To use VA financing with no down payment, you must prove you’ll live in the property as your primary residence. If you move and keep the property, you must refinance the loan to remove the home occupancy requirement.
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FHA loans are another government-backed loan. Traditionally, they require at least a 3.5% down payment, but there are ways around it. The FHA allows lenders to accept 100% gift funds as long as they have a 620 credit score or higher. You can use gift funds from family, your employer, or charitable gifts. You may also apply for down payment assistance programs in your area.
To qualify for an FHA loan, you need at least a 580 credit score, but most people need at least a 620 to get away with using gift funds for the entire down payment. FHA loans require mortgage insurance for the life of the loan, so keep that in mind when budgeting for your mortgage payment.
Like the other government-backed loans, you must prove you’ll live in the property as your primary residence to qualify.
The Fannie Mae HomeReady Loan is a program for credit-worthy borrowers with low incomes. In other words, you have great credit, but your income is too low to qualify for standard financing.
The HomeReady Loan isn’t government-backed, so it may have slightly stricter requirements including a 620+ credit score and your income must be 80% or less than the area’s median income.
Traditionally, the HomeReady Loan requires a 3% down payment, but you can use 100% gift funds or money from a down payment assistance program to qualify. Like the above loans, you’ll pay Private Mortgage Insurance on the HomeReady Loan, but the difference is you can eliminate PMI once you pay the mortgage balance down to less than 80% of the home’s value.
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Improve Your Chances to Buy a House with No Money Down
The above programs make it easier to get financing with no money down, but it always helps to improve your chances to ensure you qualify.
Improve Your Credit
Before you apply for a mortgage, pull your credit. Everyone gets free access to their credit report annually. While it doesn’t show your credit score, you’ll see your credit history which is more important.
Look for factors you should fix including:
- Late payments - If you missed a payment for more than 30 days, bring the payments current and keep paying your bills on time. Your payment history makes up the largest part of your credit score.
- Overextended credit - Keep your credit card balances at less than 30% of the credit line. Anything above 30% hurts your credit score and this is the second-largest portion of your credit score.
- Take care of collections - If you have any collections or negative public records, work with the creditor to remove them from your credit report as a condition of you satisfying the account.
Solidify Your Employment
With no money down, lenders take a big risk in lending to you. When you have your own money invested, you’re more likely to make your payments on time even when money gets tight.
To make up for this risk, you can solidify your employment. Lenders like solid 2-year employment history, but if you change jobs within 2 years, make sure it’s within the same industry and/or within the same income range or higher.
If you change industries and it’s not a ‘normal transition,’ provide proof that you will succeed at the job, such as proof of going back to school or taking training courses.
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Have Money for Closing Costs and Reserves
Even if you get help with the down payment, there are still closing costs and standard housing costs to cover. Proving to the lender that you have enough money saved to cover these costs will help you qualify for the loan.
Closing costs typically run between 3% - 5% of the loan amount. On a $200,000 loan, that means around $6,000 - $10,000 in closing costs. Lenders also like it when you have ‘reserves’ or liquid assets available to cover the standard homeownership costs.
The more money you have to prove you’re a good risk, the more likely you are to get approved for a no-money-down mortgage.
Get a Co-Signer
If you’re applying for the loan yourself and you don’t have great credit or your employment history is sketchy, consider a co-signer. Some programs/lenders allow a non-occupying co-signer but check with the lender first.
A co-signer can be a great way to compensate for other risk factors, especially a lower credit score. The co-signer is also on the hook for the loan, though, so make sure it’s someone who is comfortable picking up the slack should you default.
The Benefits of a Down Payment
While it’s possible to buy a house with no money down, if you have money saved, it may work to your benefit.
Putting money down on a home means you’ll have instant equity in the home. Equity is the difference between the home’s value and your current mortgage balance. You earn equity naturally as you pay your mortgage balance down, but it doesn’t hurt to get a head start.
Making a down payment also puts you on a higher playing field with lenders. While there are options to buy a house with no down payment, you may pay slightly higher interest rates or closing fees to make up for the risk.
Lenders put their necks on the line to lend you money without any investment from you. When you put money down, you may secure lower interest rates or more favorable terms.
The Bottom Line: How to Buy a House with No Money
There are many opportunities to buy a house with no money today. If you have even a little money to put down, though, consider it. You’ll have equity in your home right away, which may give you more options for more affordable loans.
If you use gift funds and buy a house with no down payment, make sure the payment is affordable and the term attractive. A house is one of the largest investments you’ll make in your lifetime - take your time finding the mortgage with the perfect terms for you.