FINANCIAL WELLNESS

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Mar 2018

6 Ways to Buy a House With Little-to-No Money Out of Pocket

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WHAT YOU'LL LEARN

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down payments are cool

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you can do a low down payment

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WHAT YOU'LL LEARN

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down payments are cool

Checkmark

you can do a low down payment

One of the biggest barriers to homeownership is not having enough cash to put down on a house at closing. While you might think you won’t be able to buy a home if your savings account is looking a bit lean, there are some creative ways you can make it work. From specific loan programs to family gifts and more, the odds are good that you’ll find a way to make your homeownership dream a reality.

Considerations while mortgage hunting

If you're planning on buying but trying to limit how much you pay out of pocket, keep these six things in mind while you're house and mortgage hunting:

1. See if you qualify for a VA loan

Active duty service-members, veterans and their family members are eligible for a VA loan, which is backed by the Department of Veterans Affairs. This allows qualifying buyers to purchase a home with no down payment and little-to-no closing costs.

Unlike other loan programs that may require a down payment, the VA loan program doesn't have a minimum down payment requirement.

The VA Guarantee Fee replaces the requirement for mortgage insurance, so this is an all around great way to purchase a home for those who qualify.

2. Consider an FHA loan

The FHA loan is a popular option that allows buyers to put as little as 3.5% down on a new home, which can be given in the form of a financial gift from family or from a qualified non-profit or government agency. Sellers can also contribute closing costs up to 6% of the sales price of the home.

The great thing about FHA loans is there are lower down payment requirements and less restrictive qualifying criteria, making this a great option for all potential home-buyers. But just be aware that you’ll be required to pay a mortgage insurance premium with this loan program, regardless of your down payment.

3. Opt for a Homebuyer Assistance Program

If this is your first time buying a home, there are so many resources available to help you navigate these unfamiliar waters. Fortunately, there are also some programs available at both the local and national level that offer financial assistance to new homebuyers – and in some cases, to previous homeowners as well. It could be worth looking into local programs, state programs, Non-profits, etc.

4. Don’t Overlook the USDA Loan

Another option available to borrowers who qualify, with a zero down payment requirement, is the USDA loan program, otherwise known as a rural development loan. Some eligible areas are surprisingly quite suburban – so don’t discount this loan program until you’ve checked to see if the property qualifies. It’s important to note that USDA loans do require mortgage insurance and the loan limits and income restrictions vary by area.

5. Receive a Down Payment Gift

If you’re fortunate enough to have a family member gift you money, it potentially can be used for your down payment – so long as you carefully follow the requirements set forth by your lender. You’ll need to have a paper trail showing who gifted you the money, how they gave it to you and when it was given, and that no repayment is required.

The amount that can be gifted will depend on the type of loan you choose, so it’s important to discuss your options with your lender.

6. Have the Seller Pay Closing Costs

Having your closing costs paid by the seller depends on a number of factors, including the current real estate market in your area. In a buyer’s market, where the supply of homes exceeds demand, it may not be unreasonable to ask a seller to pay some or all closing costs.

However, in a seller’s market, where the demand for homes exceeds the supply, the likelihood of a seller contributing toward your closing costs may be slim. It’s certainly worth inquiring, since many sellers want to move quickly and find it worthwhile to negotiate in order to ensure the sale closes in a timely manner.

Don’t Forget These Consideration

Using one of the methods above can certainly make buying a home more affordable if you don’t have a lot of cash on hand, but it does come with its drawbacks, which we’ll highlight below.

  • Depending on the type of mortgage you select, you may be required to pay mortgage insurance, which can impact the amount of your monthly mortgage payment.

  • Putting less of your own money down means you have less ‘skin in the game’ and you could potentially face a higher interest rate or monthly payment since lenders are taking a bigger risk.

  • A minimal down payment also means it will take you longer to build some equity in your home, and it may require you to live there longer than the standard five years in order to sell for a profit – though this is only a concern if you think you’ll need to move in a few years.

There are definitely factors to consider before buying a house with little-to-no cash down. However, if you’re in a situation where it would require you to empty your savings account in order to put a full 20% down on a home, it’s probably best to go with a lower down payment option and retain some cash for unexpected expenses. In any event, be sure to speak with a mortgage lender to discuss your home loan options and have all of your questions answered before making a decision.

Frequently Asked Questions

Chances are, if you're wondering about it, someone else has too. Here are answers to some of the questions we hear most often.

Can I really buy a home with no money down?
Yes, in certain situations. VA loans and USDA loans are two programs that may allow qualifying borrowers to purchase a home with no down payment required. VA loans are available to eligible active duty servicemembers, veterans, and qualifying family members. USDA loans are available in designated rural and some suburban areas and have income eligibility requirements. Whether either program is right for you depends on your specific situation, so speaking with a mortgage banker is a good first step.
What is the minimum down payment for a first-time homebuyer?
The minimum down payment depends on the loan program. FHA loans typically require as little as 3.5% down. Conventional loans may be available with as little as 3% down for qualifying borrowers. VA and USDA loans may allow a zero down payment for those who meet the eligibility requirements. Down payment assistance programs at the state or local level may also help reduce what you need to bring to closing. A mortgage banker can walk you through the options that may be available to you based on your income, credit, and the area where you are purchasing.
How does a VA loan work with no down payment?
The VA loan program is backed by the Department of Veterans Affairs and is one of the most significant homebuying benefits available to eligible servicemembers, veterans, and qualifying surviving spouses. Because the VA guarantees a portion of the loan, lenders are generally able to offer the program without requiring a down payment. Instead of mortgage insurance, most VA loans include a one-time VA Funding Fee, though some borrowers may be exempt. VA loans are available through lenders like Atlantic Bay Mortgage Group in states including Virginia, North Carolina, Florida, and Georgia.
Can a family member gift me money for a down payment?
In many cases, yes. Most loan programs allow gift funds from immediate family members to be used toward a down payment, but the requirements vary by loan type. You will typically need to provide documentation showing who gifted the funds, the amount, when the transfer occurred, and a statement confirming repayment is not expected. Your mortgage banker can walk you through the specific gift fund requirements for the loan program you are considering so you are prepared at closing.
What is a homebuyer assistance program and do I qualify?
Homebuyer assistance programs are offered by state housing finance agencies, local governments, and nonprofit organizations to help borrowers with down payments and closing costs. Eligibility requirements and available funding vary significantly by location. Many programs are designed for first-time homebuyers and borrowers within certain income limits, though some programs are also available to previous homeowners. Atlantic Bay mortgage bankers are familiar with programs available in Virginia, North Carolina, Florida, and Georgia and can help you explore what may be available in your area.
What is a USDA loan and who qualifies?
A USDA loan, also known as a rural development loan, is backed by the U.S. Department of Agriculture and offers a zero down payment option for qualifying borrowers in eligible areas. While the program is associated with rural communities, many suburban areas also qualify. Eligibility is based on both the property location and household income. USDA loans do require mortgage insurance, and income limits and loan limits vary by area. If you are buying in a smaller market or suburban community in states like Virginia, North Carolina, or Georgia, it is worth checking whether the area qualifies.
What does it mean to have the seller pay closing costs?
Seller-paid closing costs, sometimes called seller concessions, occur when a buyer negotiates for the seller to cover some or all of the closing costs as part of the purchase agreement. Whether this is possible depends largely on the state of the local real estate market. In a buyer's market, where there is more inventory than demand, sellers are often more open to concessions. In a competitive seller's market, like many neighborhoods in Virginia Beach, Charlotte, Atlanta, or Raleigh, sellers may be less willing to negotiate. The amount a seller can contribute is also limited by the loan program. Your mortgage banker can help you understand what is allowable for your loan type.
Is it a good idea to buy a home with no money down?
It depends on your financial situation. Buying with little or no money down can make homeownership accessible sooner and may be a smart move if depleting your savings would leave you without a financial cushion. However, lower down payments can mean paying mortgage insurance, building equity more slowly, and potentially carrying a slightly higher interest rate on some loan programs. A mortgage banker can help you compare the true monthly cost of different down payment scenarios so you can make the decision that fits your budget and long-term goals.

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The views and statements expressed are deemed reliable as of the publish date indicated and may not be accurate or reliable at any future date. The views and statements provided are those of the author. Discussions regarding any financial information provided are not intended as individual recommendations and do not reflect the views or advice of Atlantic Bay Mortgage Group, L.L.C. The views expressed are subject to change at any time in response to changing circumstances in the market. *For refinances, the total finance charges may be higher over the life of the loan. Atlantic Bay Mortgage Group, L.L.C. disclaims any obligation to publicly update or revise any views expressed or information given. Loan programs may change at any time with or without notice. Information deemed reliable but not guaranteed. All loans subject to income verification, credit approval and property appraisal. Not a commitment to lend. Atlantic Bay Mortgage Group, L.L.C. NMLS #72043 (nmlsconsumeraccess.org) is an Equal Housing Lender. Located at 600 Lynnhaven Parkway Suite 100 Virginia Beach, VA 23452.