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Wouldn't it be great if you could buy a house without having a buy a large downpayment? Buying a house with no down payment may be possible!
In 2020, having a 20% down payment is no longer required to buy a home. With rising inflation and other factors, it can be difficult for first time home buyers to come up with the required 20% down payment for rising home prices.
Something had to change and thankfully lenders are now more lenient and offer more options for those who want to buy a home without a down payment in hand. Lenders are offering different types of products and some require no money down or much less than 20%.
Let's explore your options.
What Is a Down Payment?
A down payment is the amount of money that is paid when you are purchasing a home. This number is typically represented as a percentage of the total home value selling price. For example, as represented in the image below, if the home value is $300,000 then a 20% downpayment would be $60,000.
Lenders require down payments because it protects them should you default on the loan, especially if you fail to make payments in the early years of the loan when more is owed on the mortgage loan.
Moreover, to start the process of buying a house, you need to first pay an upfront deposit to the seller or a down payment to the lender for your home loan. Most people cannot fathom buying a house without paying a large down payment which is usually 5-20% of the property value depending on the loan product.
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How a Lower Down Payment Affects Your Mortgage
While it is possible to purchase a home without a down payment or significantly lower down payment, two things occur:
Your interest rate will increase: Since the lender has more risk with a lower down payment the underwriter will increase the interest rate.
You will have to pay mortgage insurance (PMI): Since the lender is not getting a full down payment amount of 20% they will require you to pay for mortgage insurance. Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to.
Ways to Buy a Home with No Down Payment
But now there are certain options available in which you can go about buying a house with no down payment.
1. A Conventional Mortgage with No Down Payment
A conventional mortgage is a type of loan in which the down payment is typically 20%. But this type of loan can also be finalized with no down payment at all. If you have a good credit score but no cash in hand, you can start buying a house with no down payment. Also, if you have good credit — FHA and Conventional loans need just 3.5% or less down, but 100% of the down payment can be a gift.
The drawback? The deterrent for this type of loan is that you have to pay a higher rate of interest.
Also, you need to keep one of your properties as a guarantee against the payment of the mortgage loan. This is because if you are going with buying a house with no down payment, it poses an extremely high risk on the lender in case you are unable to settle the amount in time.
2. Federal Programs
Another way of buying a house with no down payment is to attend the federal programs. The VA (Department of Veterans Affair) is a kind of loan that is given to the military service officers who have retired from the service. With this approval, you can buy a house with no down payment. USDA and VA loans require zero down payment and similar programs are available for those who do not have enough credit or cash to pay for a down payment.
3. Negotiate with the Seller
Also, if you can win the confidence of the seller by showing him the proof of your steady job and income, you can successfully go about buying a house with no down payment.
If the seller is convinced that you can settle the amount in time without having to pay any down payment, you can surely buy the home without any down payment on hand.
The Bottom Line
Thus it is necessary that you have a high credit history in your name and are eligible in paying a higher rate of interest. You can check our recent article on how to check your credit score instantly here. If you’re looking to meet traditional 20% down payment, there are easy ways to boost your savings. If a mortgage with a low to no down payment is more your style, you still have options!
With these 3 methods, you can consider buying a house with no down payment. In summary, your credit score and monthly income stand as proof that you will not leave the lender empty-handed in the end.