Buy a Home With No Money Down

Coming up with the down payment for a home can be a struggle. Mortgages are available, however, for prospective homeowners in all different income brackets, some offering down-payments as low as 3.5% of the value of the home. Figuring out what options are available to you is an important first step of home ownership.

Steps

Applying for a Zero-Down Mortgage as Low Income Applicant

  1. Gather the basic requirements for a Federal Housing Authority (FHA) Loan. Before applying for an FHA-insured home loan, you must gather all of the documents that you will need in order to submit an application. You will need the following information:
    • Proof and address of your place of residence for the previous two years.
    • Social Security numbers of those applying for the loan.
    • Employment history, including the name and address of your employer for the previous two years.
    • Proof of income, including your gross monthly salary, W-2 forms, pay stubs, and tax returns for the previous two years.
    • Information regarding all checking and savings accounts.
    • Information regarding any real estate that you own.
    • Loan history, if applicable.
    • If you are a veteran, have your Certificate of Eligibility and DD-214.
    • Approximate value of your personal property.
    • A recent credit report.
    • An official appraisal of the property that you want to purchase.[1]
  2. Contact an FHA-approved lender. The FHA does not loan money directly to potential home owners. Rather, it has a list of approved lenders that make loans through FHA-insurance programs.[2] After gathering all of the required loan information, your next step is to contact an FHA-approved lender and discuss potential mortgage terms. You can find a list of FHA-approved lenders here: http://www.hud.gov/ll/code/llslcrit.cfm.
    • Discuss the ways that you can purchase a home for little to no money down. The lender should be able to tell you the amount that you can finance through a mortgage.
    • Technically, the FHA does not offer a no-money down loan. However, you can get a loan with a down-payment as low as 3.5% of the purchase price of the home and lenders are restricted in the amount of fees that they can charge you.[3]
    • If you qualify for an FHA-insured mortgage, you can determine whether you also qualify for down payment support from your state or other lenders (discussed below). If you qualify, you can purchase a house without having to put any money down.
  3. Seek a pre-approved mortgage. While you are not required to seek pre-approval, the FHA recommends that you take this step in order to find out early in the process whether you will qualify for a mortgage and how much the lender is willing to let you borrow. You should discuss a pre-approved mortgage with the FHA-approved lender and ask them about what steps you must take.[4]
  4. Complete a Uniform Residential Loan Application. This application starts the mortgage approval process. You may be asked to complete this form if you seek pre-approval but you will be required to complete the form during the mortgage process and usually after you have identified a house that you want to purchase.
  5. Seek an underwriting and document review. Once you have completed your paperwork, chosen a home to purchase and had the home appraised, you submit all of your documents for review. The lender will examine your paperwork and determine whether your information supports making a loan that they believe will be repaid.
    • During the process, you may be asked to give a more detailed explanation of certain aspects of your income, expenses or debt. This is a fairly routine request and often only requires a short letter of explanation that responds to the lender’s questions.
    • If the lender finds serious concerns about your ability to pay for the loan, you may not qualify for mortgage through this FHA program.
    • If your loan makes it through the underwriting process, there is a good chance your loan will be approved.[4]
  6. Receive loan approval. If the underwriter believes that you meet all of the lender’s guidelines and the FHA’s guidelines, you will be approved for financing of your home, also known as a mortgage. If your offer or Determine What to Bid on a House on a home has been accepted, you can move towards closing on your new home.[4]
  7. Determine whether you qualify for down payment assistance in your state. If you are unable to afford the 3.5% down payment on your home, you can seek down payment assistance through state programs, sometimes referred to as secondary financing assistance. You can locate agencies or nonprofits that offer secondary financing assistance in the following places:

Applying for a Zero-Down Mortgage as a Veteran

  1. Determine if you qualify for a Veteran’s Administration (VA) loan. The VA provides home loan guaranty benefit to assist military service members, veterans, and eligible surviving spouses become homeowners. The VA has a list of qualifying requirements for the loan program based on your time of service, whether you served in a war, and related to your spouse’s service if you are a surviving spouse of a veteran. You can review the list of service requirements here: http://www.benefits.va.gov/homeloans/purchaseco_eligibility.asp.
  2. Gather documents for a Certificate of Eligibility. In order to apply for a VA-backed loan you must provide proof that you are eligible for the program. Depending on your service and whether you are currently in the military, you must provide the following proof:
    • Military veterans and current or former National Guard or Reserve members who have been activated for federal active service must provide DD Form 214, which shows the character of service and the reason you left the military.
    • Active Duty Service members and current National Guard or Reserve members who have never been activated for Federal active service must provide a current statement of service that is signed by the adjutant, personnel office, or commander of the unit or higher headquarters. This statement must include: the service member’s full name; social security number; date of birth; entry date on active duty; the duration of any lost time; and the name of the command providing the information.
    • Discharged members of the National Guard who have never been activated for Federal active service must provide NGB Form 22—Report of Separation and Record of Service—for each period of National Guard service, or NGB Form 23—Retirement Points Accounting, and proof of the character of service.
    • Discharged members of the Selected Reserve who have never been activated for Federal active service must provide a copy of their latest annual retirement points statement and evidence of honorable service.
    • Surviving Spouses in Receipt of Dependency & Indemnity Compensation benefits must submit VA Form 26-1817, located at http://www.vba.va.gov/pubs/forms/VBA-26-1817-ARE.pdf, and the veteran’s DD214, if available.
    • Surviving Spouses who are not receiving Dependency & Indemnity Compensation benefits must submit the following to the appropriate Compensation and Pension office: VA form 21-534 located at http://www.vba.va.gov/pubs/forms/VBA-21-534-ARE.pdf; DD214 (if available); Marriage License; and a Death Certificate or DD Form 1300 – Report of Casualty. You can find the address for your local Compensation and Pension office here: http://www.benefits.va.gov/HOMELOANS/documents/docs/pmcaddress.pdf.[5]
  3. Request a Certificate of Eligibility (COE). You can request your Certificate of Eligibility in the following ways:
  4. Find a mortgage lender. Since the VA does not lend money itself, you need to locate a Find a Mortgage Lender that works with VA loans. Once the lender confirms that they work with VA loans, consider the following in evaluating the lender:
    • Get offers from several lenders and see who is offering you the best interest rates.
    • Show the lenders their competitors’ offers to see whether they will match or beat the best offer you received.
    • Check whether the lender is offering you a mortgage rate that is competitive to mortgage rates that people of similar credit ratings are receiving. You can see a breakdown of mortgage rates by credit score here: http://www.myfico.com/LoanCenter/Mortgage/Step4/FairLoan.aspx.
    • Ask all of the lenders to explain all of the closing costs, fees and any other expenses associated with the loan so you can understand and compare the true costs of each loan.[6]
  5. Seek preapproval for your loan. By choosing to get prequalified for your VA loan, you can determine whether you will qualify for a loan and the amount you will qualify. Once preapproved, you can begin looking at properties and begin the home purchasing process. Generally, to become preapproved for a VA loan, lenders will examine your income, debt, expenses and other factors to determine whether they believe you will be able to repay a loan and the amount of the loan you can afford to repay.[7]
  6. Calculate your Debt-to-Income Ratio
    • Add up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, homeowners’ dues, etc.) and all recurring monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.). Then, take that amount and divide it by the gross monthly income.
    • The maximum ratio to qualify is 41%.
    • In the event the number exceeds the 41%, the VA has a residual income guideline which can allow approval, yet are not considered a compensating factor.[8]
  7. Apply for a home loan. Your lender will provide you with all of the paperwork that you need to apply for the home loan as well as a checklist of any documents or information that you must provide with the application. If you went through the preapproval process, you may have already submitted some of the required documentation but there will be a much closer examination of your finances before a loan is finally approved.
    • You will need your DD214: Proof of Military Service form, and a prospective property.
    • Remember: all veterans who meet the criteria are eligible for the loan, but that does not mean that you will necessarily qualify for the loan that you seek.
    • The VA guarantees a loan of 25% of an amount up to $104,250, generally the list price of the home, plus the funding fee, which limits the maximum loan to $417,000.
    • Because there is no down payment involved, this will be a Guaranteed Loan, which means that the lender is protected against failure to pay.[9]

Applying for an 80-20 Mortgage

  1. Evaluate whether two mortgages is the best option for you. An 80-20 mortgage is essentially two separate home loans, one for 80% of the home’s price and the other which covers the remaining 20% of the home’s price. Individuals choose an 80-20 mortgage to avoid a large down payment and monthly private mortgage insurance. When evaluating whether you would qualify for an 80-20 mortgage, consider the following:
    • Lenders typically look for individuals with a very high credit rating when offering two mortgages. The lender wants to be certain that the person can afford to make both payments.
    • Lenders may offer you a fixed rate on the 80% loan. However, lenders may only offer you a variable rate on the 20% loan, which means if interest rates go up, you may have to pay more than you originally planned.
    • Lenders may restrict the amount of the second loan because there is an increased risk in offering two loans to one home purchaser.
    • If you do qualify, you will have two payments, but talk to your financial advisor about consolidating them into a monthly lump sum. [10]
  2. Use caution. You should be fully aware that taking out two loans to finance the purchase of a house can be a very risky venture.
    • Before the mortgage crisis of 2008, these loans were easy to come by and were possible to profit from. It was, however, one of the main causes of the mortgage crisis in 2008, making it an extremely difficult option to pursue now.
    • The problem with these types of loans is that, if the home loses value, you can end up owing more than the value of the home, meaning that you will lose money if you want to sell your house.
    • Likewise, an 80-20 loan will involve a much higher interest rate and higher monthly payments, which can make it difficult to make ends meet if you have trouble coming up with the monthly payments.[11]
  3. Locate a lender or lenders willing to make an 80-20 loan. You need to locate a Find a Mortgage Lender willing to make an 80-20 loan. When discussing the potential loans, ask the lender to calculate:
    • Whether two loans with a blended interest rate saves you money as compared to a single loan that requires insurance.
    • Whether there is an early repayment penalty for the smaller loan. You may be able to save money over the life of the loan if you repay the smaller loan back more quickly since it will most likely have a higher interest rate.[12]
    • Discuss your plans with a financial advisor. Make sure that you will be able to repay both loans and that it makes financial sense to get two loans versus one loan with insurance.

Leasing With an Option to Purchase

  1. Decide if leasing with an option to buy is right for you. This is another way to potentially purchase a house with little or no money down. Also known as an option or "rent to own," this is an opportunity for you to rent a home you eventually plan to purchase, with a percentage of the rent paid going toward a downpayment on the property.[13]
    • The rent on an optioned house is going to be above market (because you are also paying toward the downpayment), so it may not be worth it to enter this arrangement unless you have your heart set on that particular house.[13]
  2. Find an owner who is willing to option her house. People who have struggled to sell their home and are motivated may be more open to this arrangement.[13] Keep an eye out for a house that has been on the market for a long time.
  3. Know the risks. While this can be a great arrangement for some, it is not for everyone. Be aware that there are risks involved with renting to buy, namely that, should you choose not to purchase the home, you will not get back any of the option money back, losing whatever you paid toward the downpayment. It does mean that, should you change your mind, you are under no obligation to buy the house at the end of the lease.[14]
    • Make sure you have the home inspected before signing the lease or, at the very least, before buying the house. An appraisal will ensure you are paying a fair price for the home and you'll also find out if the house needs any major repairs. If there is major work to be done, it might be best not to enter into such an agreement, since the repairs may cost you quite a bit.[14]
    • Make sure you have agreed who will be responsible if anything happens to the house while you are leasing.[13]
  4. Negotiate a contract. You will need a standard lease agreement, plus an option to purchase.[14] Because the title to the house remains with the original owner until the house is actually purchased, you will need a lease agreement as you would with any tenant/landlord situation. In addition, the option to purchase will grant the tenant the option to purchase the house after a predetermined amount of time.[14] This includes the option fee, which is either paid upfront or as the higher-than-market rent.[14] Both parties should have a lawyer review the contracts and make sure the following is established:[13]
    • Length of the lease period
    • Rent amount
    • Percentage of rent going toward downpayment and how it will be held (usually in escrow)
    • What will happen if the renter decides not to buy at the end of the lease period (usually the renter loses the option money)
    • Who will pay for repairs, utilities, etc. (usually the tenant)
    • Who will pay property taxes, insurance and homeowner fees
    • What happens if the home value rises or falls between the time you sign the agreement and the end of the lease

Buying a Foreclosure Home

  1. Understand the FHA foreclosure process. When a person stops paying their FHA-guaranteed mortgage, the FHA may start the foreclosure process, which means that since the buyer can no longer make payments, the FHA will sell the home to pay off the mortgage of the defaulting buyer.[15] Individuals can sometimes purchase FHA foreclosures, for little to no-money down.[15]
  2. Research foreclosure homes available in your state. The FHA as part of HUD provides a website where homeowners can search for HUD properties for sale. You can search for these properties here: http://hudhomestore.com/HudHome/Index.aspx.
    • Non-government websites also allow you to search for FHA foreclosures. You can locate these websites by conducting an internet search for “FHA foreclosure properties.”
    • If possible, you will want to determine the reason for the foreclosure. The fact that the home was foreclosed upon may mean there is something structurally wrong with the house that you will need to get fixed as soon as possible. It may also mean the home was owned by someone who got locked into a high-interest loan they could not afford and ended up defaulting. It will be your burden to determine this.
  3. Decide how much work you want to put into your house. Depending on the reason for foreclosure, these homes may be what you might call “fixer-uppers” or simply be move-in ready homes that someone could no longer afford. Before purchasing a foreclosed home, you should understand the terminology of foreclosure so that you better understand what type of property you may be purchasing.
    • Insured (IN) homes are homes that have been foreclosed upon, but meet the Minimum Property Standards (MPS). This means that they have been evaluated by a home inspector, who has “passed” the home.
    • Insured with Escrow (IE) homes require some measure of repair to meet the MPS. This means that the home may have some pressing structural, heating, or plumbing deficiencies that will need taken care of in the short term. The problems are not such that the house is uninhabitable, but significant enough to affect the value of the home.
    • Uninsured (UI) homes do not meet MPS. This means that the home requires structural, heating, or plumbing repair before it can be inhabited.
    • People who undertake the project of a foreclosed home are may be DIY-types who enjoy the challenging of fixing up a property acquired on the cheap. If you are not excited about the idea of gutting a house and installing a new septic system (or paying to have this done), this might not be the option for you.
  4. Have the home inspected. Before purchasing the home, you need to fully understand the condition of the home and the amount of work and money you will need to invest so that the home is livable. You should hire a home inspector who can evaluate the home, determine any significant structural problems and establish how much it will cost to repair.
    • While homes that need substantial work are technically not available for “no money down” mortgages, if the home meets a certain threshold for repairs, you may be able to qualify for an FHA rehabilitation loan.
  5. Calculate the cost of the necessary repairs.
    • If you have discovered significant structural problems, decide how you're going to fix the home up and how much it will cost.
    • If you plan to do the work yourself, determine how much the materials cost and how much you can reasonably expect for your labor.
    • If you plan to hire someone to perform the work, determine how much will it cost and how long it will take.
  6. Apply for an FHA 203k home repair mortgage after inspection. This FHA program allows home buyers to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home.
    • Contact an FHA-approved lender and discuss the application process. You can locate lenders at: http://www.hud.gov/ll/code/llslcrit.cfm
    • You should keep in mind that purchasing a foreclosed property that needs a lot of work may not be the best option, particularly if the sum for the repairs exceeds the purchase price of the home, essentially resulting in a “zero money down” payment after the fact.

Warnings

  • Beware of predatory lending. The only no money down options available involve either extraordinarily high interest rates or monthly payments, which are dangerous to get locked into. Consult your financial advisor before entering into any “too good to be true” loans.

Related Articles

Sources and Citations

  1. ↑ http://www.fha.com/fha_requirements_checklist
  2. ↑ http://www.govloans.gov/loans/loan-details/504
  3. ↑ http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/ins/203b--df
  4. ↑ 4.0 4.1 4.2 4.3 http://www.fhahandbook.com/blog/fha-approval-process-5-steps/
  5. ↑ 5.0 5.1 http://www.benefits.va.gov/HOMELOANS/purchaseco_certificate.asp
  6. ↑ http://www.myfico.com/loancenter/mortgage/step4/
  7. ↑ http://www.benefits.va.gov/homeloans/purchaseco_buy_process.asp
  8. ↑ http://www.valoans.com/va_facts_debt
  9. ↑ http://www.valoans.com/va_facts_whatis
  10. ↑ http://homeguides.sfgate.com/80-20-mortgage-loan-7591.html
  11. ↑ http://homeguides.sfgate.com/requirements-money-down-mortgage-2194.html; http://www.marketwatch.com/story/no-money-down-home-loans-are-back-2013-02-01
  12. ↑ http://www.thetruthaboutmortgage.com/mortgage-combos-and-blended-rate/
  13. ↑ 13.0 13.1 13.2 13.3 13.4 http://www.realtor.com/advice/rent/rent-to-own-agreement-can-benefit-buyer-and-seller/
  14. ↑ 14.0 14.1 14.2 14.3 14.4 http://www.nolo.com/legal-encyclopedia/the-basics-rent-own-agreements.html
  15. ↑ 15.0 15.1 http://www.fhaforeclosure.com
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