Buying a house is a significant milestone in people’s lives. Unfortunately, many people cannot afford the down payment necessary to purchase a home with a mortgage. Fortunately, potential buyers have a few alternatives.
What is a Down Payment?
A down payment on a house is the money a home buyer is required to give a lender to obtain a loan to purchase a home. A lender typically views a down payment as proof you’re invested in the home and have the means to make all of your mortgage payments.
Conventional loans usually require 20% of the purchase price of the home as a down payment, though down payments can be as low as 5% if the house is $417,000 or less. Some programs even allow buyers to buy a home with 3.5% down on a 30-year fixed-rate mortgage, but again within certain purchase price limits.
Benefits of a Down Payment
While a down payment can be a large financial commitment, it also reduces the amount of interest you end up paying on your loan in the long run. For example, let’s say you’re buying a home for $100,000 with 20% down versus 5% down. With the 20% down payment, you’ll only have $80,000 left on your mortgage loan, plus interest. At 5%, you’ll have $95,000, with interest that adds up with higher mortgage loan obligations.
Banks and lenders are also more likely to give a home buyer a lower interest rate if they put 20% down on a home, versus something less. Making a higher down payment is a sign you’re financially stable and are a good credit risk.
Drawbacks of a Down Payment
There are two main drawbacks to purchasing a home with a down payment. The most obvious one is that the money becomes unavailable for anything else. A down payment may represent all or almost all of your current savings, so making the down payment may make some people feel nervous about not having a financial cushion until they’re able to save again. It also means those savings cannot be invested elsewhere.
The other drawback is exposure to losses if you have to sell the home later and it has fallen in value. In that case, the loan balance still has to be repaid in full from the proceeds of the sale, and you get whatever is left. For example, if you purchase a $100,000 home with 20% down and an 80% mortgage loan, but then you sell the home for $95,000, you will have lost $5,000, not including closing costs and the interest you’ve paid down on the loan.
How to Buy Without a Down Payment
What’s great about today’s real estate market is that there are several options that don’t require a down payment. We’ll walk through each of them below.
If you’re a veteran, you may qualify for a VA mortgage. VA loans offer 100% financing so you don’t need to put money down. VA loans don’t require mortgage insurance, which saves borrowers thousands of dollars a year. These loans are one of the cheapest mortgage programs available today.
The VA loan does require a one-time VA funding fee of 2.15% of the loan amount. For example, on a $100,000 mortgage, the funding fee will be $2,150 and can be financed into the loan.
The credit requirements for VA loans will depend on the lender. Most require a 620 credit score or higher, but lower VA minimum credit requirements can be found with smaller lenders.
The U.S Department of Agriculture created a housing program to help rural development. The USDA loan is a zero-down mortgage for low-to-moderate-income families. Another benefit of these loans is the mortgage insurance premium is much lower than normal. Borrowers only pay an annual fee, which is 0.35% of the loan amount. This fee is added to your monthly payment. The upfront fee is equal to 1% of the loan amount.
While the FHA Loans do require a down payment, it’s smaller than what’s required by conventional loans. The Federal Housing Administration was created in 1934 to encourage homeownership. They reduced the requirements to get a mortgage loan so more people would qualify.
The FHA insures these loans, so if the borrower defaults on the loan, the FHA pays the lender. If you have at least a 500 credit score, you can qualify with a 10% down payment. FHA loans have varying mortgage terms that borrowers can choose from. The 30-year and 15-year fixed-rate mortgage loans are the most popular. The FHA mortgage insurance is paid in two parts – an upfront fee of 1.75% of the loan amount and an annual premium of 0.45% to 1.05% of the loan amount.
ZeroDown is a newer option that can make a lot of sense for people with steady jobs and healthy finances, even in higher cost of living cities like San Francisco. ZeroDown is an alternative to the rent-or-own dilemma by offering the benefits of homeownership with the flexibility of renting.
ZeroDown does not require a down payment, and customers are not locked into a commitment to buy a home. It’s not a loan, but instead a rent-to-own product.
Here’s how it works. First, they look at your financials to calculate your ZeroDown Buying Power, which is the price range of homes accessible with the program. Then, you house hunt with one of their top-rated ZeroDown partner agents. Once you have found your dream home, you pay a $10,000 program fee, and ZeroDown purchases the home with an all-cash offer.
You have an option to buy the home from ZeroDown, and make monthly payments and build up purchase credits while living in the home. Anytime after your second year in the house and until the end of a five-year term, you can exercise that option and apply your accumulated purchase credits to the purchase of the home. But if you decide you’re no longer interested in the home, you can walk away anytime after the end of the second year and get a portion of your purchase credits. You can even set up a time to talk with an expert to learn if ZeroDown is a good fit for you.