How to buy a home with zero down payment?

Dated: 06/03/2020

Views: 180

Closing real estate deal

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With no question, this year could be the best time to purchase a home. Home prices are on a steady rise as demands continue to increase while supply remains flat. The prospect of capital appreciation for your real estate assets is looking bright moving into the year 2021. 

Now while market conditions are perfect, personal circumstances might not be. One of the biggest hurdles into homeownership is the downpayment requirement which could at least be between 20 to 30%, traditionally. For most Americans, raising that amount could take years and comes with that delay is their dream of becoming a homeowner. An article from Money.com says Forty-Six percent of Millenials and Forty percent of Americans overall cites that affording a downpayment is the biggest barrier to homeownership. 

So, is there a workaround for this?

Prior to 2008, the concept of zero-downpayment gained popularity. It spiked the demand for residential homes and values rapidly rise. But, due to the lack of well-defined credit guidelines, the market created an artificial demand coming from home buyers acquiring multiple properties on top of their primary homes. The end results were devastating.

Zero downpayment doing a comeback

Right now, the popular zero-down program is making a comeback but in another form with a package than its predecessor complete with safety nets and a rather straight cut credit policies designed to mitigate the very thing it created before. 

How to avail of a zero-down home purchase?

There is more than one way to achieve this depending on your profile, location, and type of property you want to acquire. But here is a list of every home buyer’s options to availing a zero-downpayment, or at least close to it, transaction when acquiring a home.

USDA Loan

U.S Department of Agriculture mortgage program is a government-backed loan that offers a zero-down-payment mortgage for rural and suburban homebuyers. The intention here is to support economic development in rural areas. USDA loans have more lenient guidelines, here are some;

  • US Citizenship (or permanent residency)

  • Credit Ratio of up to 41% or higher ratios if you have a credit score of above 680

  • Available only for rural and suburban areas. Metropolitan location are generally excluded

VA Loan

VA loans are mortgage loan programs offered by the United States Department of Veteran Affairs. These are mortgage loan packages offered to active and veteran service personnel. The Veteran’s Affairs sets the credit guidelines and but not actually offer to finance, instead, they guarantee a portion of the loan and issues it through a private mortgage lender

Here are some benefits of availing a VA Loan

  • No downpayment unless required by your lender

  • No private mortgage insurance premiums

  • Low closing cost

  • No pre-payment penalties

  • Available assistance from VA to help with default

Here are the eligibility criteria listed by Veterans United;

  • You have served 90 consecutive days of active service during wartime, or

  • You have served 181 days of active service during peacetime, or

  • You have 6 years of service in the National Guard or Reserves, or

  • You are a spouse of a service member who has died in the line of duty

FHA Loan + Downpayment Assistance

Federal Housing Administration or FHA loans are also offered to low-moderate income earners. The FHA loan requires a minimum downpayment of 3.5% if you have a credit score of at least 580 or 10% if you have a credit score between 500 to 579. 

To achieve a zero-downpayment package, you may simultaneously apply for a grant on downpayment assistance to supplement your FHA loan. The downpayment assistance grant will then be folded back into your total mortgage or lender may opt to charge you in the long run by raising your interest rate.

  • A credit score of at least 580, you can avail of 3.5% down payment

  • A credit score of 500 to 579, the required downpayment is 10%

  • MIP (Mortage Insurance Premium) is required

  • Debt to income ratio of 43% or lower

  • Purchased home must be the borrower’s primary home

  • Must have a regular income with proof employment

Other closing costs on top of the downpayment

Earnest Money. The amount of Earnest Money depends on market conditions. When it is on a hot market, the seller might take the offer with more earnest money. But properties that had been sitting in the market for a long time, often don’t require high earnest money. The same is true for fixer-upper homes.

Or, a straight forward approach here is to ask your Real Estate Agent to craft a strategy where it would allow a minimum earnest money deposit.

Closing Cost. This may include the appraisal fee, attorney’s fee, credit report, title searches, home inspection fee, and other costs relative to the purchase transaction. Total closing cost may range from Three to Five Percent of the home price. But, you may avoid paying the closing cost by;

  1. Availing a no-closing cost mortgage. Now for select lenders, they offer such a package wherein they will absorb the closing cost then fold it back into the loan amount or simply charging you in the long run by higher interest rate. 

  2. You can negotiate with the seller who pays for the closing cost. Simple as it is, but there are a good number of transactions where the seller agrees to pay the closing cost.

Types of Property I can acquire using a zero-down approach

Single Family Residences are the main property type that these zero-down mortgage packages are created for. However, workaround on multifamily residence was also introduced. A multi-family can qualify if;

  1. It has a maximum of 4 units. Multi-family. Anything above 4 units is generally not acceptable.
  2. You have to use one unit of the multifamily as your primary residence.

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If I don’t fall into any of the above criteria, can I still avail of a zero-down program?

In some cases, yes. But we have to understand what is your situation first. To know what are your options on availing a zero downpayment loan, book a free consultation with us today.

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